Question

At the start of the current year, Blue Corporation (a calendar year taxpayer) has accumulated E & P of $100,000. Blue's current E & P is $60,000, and at the end of the year, it distributes $200,000 ($100,000 each) to its equal shareholders, Pam and Jon. Pam's stock basis is $11,000, Jon's stock basis is $26,000. How is the distribution treated for tax purposes?

Answer 1

Answer:

Pam and Jon's dividend income = $80,000 each

[ ($100000 Accumulated E&P + $60000 current E&P ) / 2] = $80,000

Statement of distribution for shareholders for tax purpose

                                            Pam           Jon

Total distribution            $100,000    $100,000

Less: Dividend income   $80,000     $80,000

                                        $20,000    $20,000

Less: Stock basis            $11,000       $26,000

Capital gain                     $9,000           $0

Therefore, Pam has a taxable gain of $9000 which reduces the stock basis to $0, whereas Jon has not any taxable gain but the stock basis has reduced to $6000 [$26000 - $20000]