Question

Tiny and Tim each own half of the 100 outstanding shares of Flower Corporation. This year, Flower reported taxable income of $6,000 and was subject to a 21 percent tax rate. In addition, Flower received $20,000 of life insurance proceeds due to the death of an employee (Flower paid $500 in life insurance premiums this year). Flower had $5,000 of accumulated E&P at the beginning of the year. (Leave no answer blank. Enter zero if applicable.)

b. Flower distributed $6,000 on February 15 and $30,000 on August 1. What total amount of dividends will Tiny and Tim report? (Do not round intermediate calculations.)

total dividends Feburary 15? August1?

c. What amount of capital gain (if any) would Tiny and Tim report on the distributions in part (b) if their stock basis is $2,000 and $10,000, respectively? (Do not round intermediate calculations.)

Capital gain-tiny?

Capital gain- tim?

Answer 1

Ans-b- Calculating the total amount of total dividends Tiny and Tim report:-

Amount Distributed	$6,000	$30,000
Proportion of total distribution	1/6	5/6
Current E&P ($24,000 divided 1/6, 5/6)	$4,000	$20,000
Accumulated E&P	$2,000	$3,000
Total Dividend	$6,000	$23,000

Ans-c- The $6,000 distribution in February would have no impact on stock basis since this entire amount is treated as a dividend.Only $23,000 of the August distribution was dividend income and so the remaining $7,000 would be treated as a return of capital.

Thus, $11,500 of the $15,000 received by each shareholder in August would be treated as dividend and the remaining $3,500 would be a return of capital. The $3,500 return of capital would reduce the basis of Tiny's stock to zero and generate $1,500 capital gain ($3,500-$2,000). The $3,500 return of capital would only reduce Tim's basis to $6,500 ($10,000 less $3,500)