Question

Problem 12-28 (Algorithmic) (LO. 6)

On January 1, 2017, Kinney, Inc., an S corporation, reports $34,400 of accumulated E & P and a balance of $86,000 in AAA. Kinney has two shareholders, Erin and Frank, each of whom owns 500 shares of Kinney's stock. Kinney's nonseparately stated ordinary income for the year is $43,000.

Kinney distributes $51,600 to each shareholder on July 1, and it distributes another $25,800 to each shareholder on December 21. How are the shareholders taxed on the distributions?

Do not round intermediate computations. If required, round your final answer to the nearest dollar.

Erin and Frank each report $__________ dividend income for the July 1 distribution and $____________ each for the December 21 distribution. Assuming that the shareholders have sufficient basis in their stock, both Erin and Frank each receive a tax-free  $______________ distribution from AAA.

Answer 1

Balance in AAA balance available for distribution

86000 + 43000 ordinary income

$        129,000

Total distributions made to shareholders

(51600 x 2 + 25800 x 2) = 154800

Now AAA balance available proportionately on each date of distribution

103200 x 129000/154800 = 86000

1-Jul

51600 x 129000/154800 = 43000

21-Dec

Total distribution made on July 1 was 103200 and available balance was 86000, difference (103200-86000 = 17200)

So Erin and Frank both will report 17200/2 = 8600 dividend income for July 1

Total distribution made on December 21 was 51,600 and available balance was 43000, difference (51600-43000 = 8600)

So Erin and Frank both will report 8600/2 = 4300 dividend income for December 21

Assuming that the shareholders have sufficient basis in their stock, both Erin and Frank each receive a $64,500 tax-free distribution from AAA.