Question

This year, Sooner Company reports current E&P of negative $424,000. Its accumulated E&P at the beginning of the year was $354,000. Sooner distributed $708,000 to its sole shareholder, Boomer Wells, on June 30 of this year. Boomer’s tax basis in his Sooner stock is $122,500.

a. How much of the $708,000 distribution is treated as a dividend to Boomer?

Dividend $142,000

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

Tax basis $0

c. What is Sooner’s balance in accumulated E&P on the first day of next year?

Balance in accumulated E & P $

Answer 1

(a) How much of the $708,000 distribution is treated as a dividend to Boomer?

Compute the Accumulated E&P as of June 30

Current year E&P (Negitive) =$424000*6/12 =$212000

Net E&P =$354000-$212000 =$142000

Dividend is the Amount equal to the amount distributed to the extent of E&P. So the Dividend Amount is $142000

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

Boomer’s tax basis in his Sooner stock is $0,

which is his beginning tax basis of $122,500 less the lesser of the distribution in excess of accumulated E&P ($566,000) or his basis in the Sooner stock ($122,500).

(c ) What is Sooner’s balance in accumulated E&P on the first day of next year?

Amount in $

Accumulated E&P Beginning of the year

354000

Currnet E&P

-424000

Less: Dividend paid

-142000

Accumulated E&P at the end of the year

-212000

Sooner’s balance in accumulated E&P on the first day of next year is ($212,000)