Question

Bullwinkle Corporation, an S corporation, reports the following results for the current year:

Ordinary income = $40,000

Long-term capital gain= $18,000

Section 1231 gain = $8,000

Short-term capital loss= $14,000

Bullwinkle's AAA and accumulated E&P balances at the beginning of the year are $40,000 and $30,000, respectively. Bullwinkle made a $70,000 cash distribution to its sole shareholder, Maryann, on June 1 and a second $70,000 cash distribution on December 1. Maryann's basis in her Bullwinkle Corporation stock on January 1 was $60,000.

Calculate the following items. and enter the numerical answer for each item in the text box. Show support for your work on your scratch paper in order to earn credit.

Bullwinkle's AAA balance at the end of the year is  .

Bullwinkle's AEP balance at the end of the year is  .

Maryann's basis in her Bullwinkle Corporation stock at the end of the year is  .

What are the tax consequences to Maryann of the $140,000 distribution from Bullwinkle? Put your answer to this question on your scratch paper. Show support for your work on your scratch paper in order to earn credit.

Answer 1

Calculation of AAA's balance at the end of the year

Balance at the beginning of the year	$   40,000.00
Ordinary Gain	$   40,000.00
Long term capital gain	$   18,000.00
Section 1231 gain	$     8,000.00
Short term capital loss	$ (14,000.00)
Balance before distribution	$   92,000.00
Distribution as on June 1	$ (70,000.00)
Distribution as on Dec 1	$ (22,000.00)
Balance at the end of the year	$                 -

Calculation of AEP's balance at the end of the year

Balance at the beginning of the year	$   30,000.00
Distribution as on Dec 1	$ (30,000.00)
Balance at the end of the year	$                 -

Maryann's basis in her Bullwinkle Corporation stock at the end of the year

Initial Basis	$   60,000.00
Ordinary Gain	$   40,000.00
Long term capital gain	$   18,000.00
Section 1231 gain	$     8,000.00
Short term capital loss	$ (14,000.00)
Total basis before Distribution	$ 112,000.00
Less: Distribution out of AAA	$ (92,000.00)
Less: Distribution out of AEP (taxable)	$                 -
Less: Distribution in excess of AAA and AEP	$ (18,000.00)
Basis at the end of the year	$     2,000.00

The total distribution of $140,000 in the hands of Maryann shall be treated as follows:

Paid out of AAA	$   92,000.00	Reduced from the basis
Paid out of AEP	$   30,000.00	Treated as Taxable dividend
Paid in excess of AAA and AEP	$   18,000.00	Treated as return of Capital
Total dividend	$ 140,000.00

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