Question

Problem 5-24 (Algorithmic) (LO. 1, 4) At the start of the current year, Blue Corporation (a calendar year taxpayer) has accumulated E & P of $185,000. Blue's current E & P is $111,000, and at the end of the year, it distributes $370,000 ($185,000 each) to its equal shareholders, Pam and Jon. Pam's stock basis is $25,900; Jon's stock basis is $103,600. How is the distribution treated for tax purposes? If an amount is zero, enter "0". Pam has the following: Dividend income: $ Capital gain: $ Stock basis after distribution: $ 0 Jon has the following: Dividend income: $ Capital gain: $ 0 Stock basis after distribution: $

Answer 1

Answer:

Explanation:

Pam and Jon's dividend income of $134,500 each [($185,000 Accumulated E&P + $111,000 current E&P) / 2],

Statement of distribution for shareholders for tax purpose :-

                                  Pam      Jon

Total distribution $185,000 $185,000

less: Dividend income $134,500 $134,500

                                     $50,500 $50,500

less : Stock basis $25,900 $103,600

Capital gain          $24,600 $0

Pam has a taxable gain of $24,600 which reduces the stock basis to $0, whereas Jon has not any taxable gain but the stock basis has reduced to $53,100 [$103,600- $50,500]