Question

This year, Sooner Company reports current E&P of negative $300,000. Its accumulated E&P at the beginning of the year was $200,000. Sooner distributed $400,000 to its sole shareholder, Boomer Wells, on June 30 of this year. Boomer’s tax basis in his Sooner stock is $75,000. (Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign.)

a. How much of the $400,000 distribution is treated as a dividend to Boomer?

Dividend?

b. What is Boomer’s tax basis in his Sooner stock after the distribution?

tax basis?

  

Answer 1

Ans-a- The amount of distribution to be treated as a dividend to MR.Boomer:-

Calculating the deficit in current Earnings & Profits-

Deficit in current E&P= Current E&P/ Number of months in a year * [Number of months (June 30-December 31)]

=$300,000*6/12

=$150,000

Calculating the distribution out of $400,000 to be treated as dividend-

Dividend to Mr. Boomer=Accumulated E&P-Deficit in current E&P

=$200,000-$150,000

=$50,000

Therefore, $50,000 out of distribution $400,000 to be treated as dividend.

Ans-b- Calculating tax basis of Boomer in his Sooner stock after the distribution:-

The tax basis of Boomer if $75,000

Accumulated E&P is $350,000 ($400,000-$50,000).

This portion of distribution amount that is not a dividend ,reduces the tax basis of Boomer in Sooner's stock and is treated as nontaxable return of capital.

The tax basis of Boomer on his stock ($75,000) is lesser than the distribution and in excess of accumulated E&P that is,$275,000 ($350,000-$75,000).Hence, Boomer's tax basis is $0. The remaining balance of accumulated E&P $275,000 is considered as capital gain.