Question

This year, Sooner Company reports current E&P of negative $426,000. Its accumulated E&P at the beginning of the year was $264,000. Sooner distributed $528,000 to its sole shareholder, Boomer Wells, on June 30 of this year. Boomer’s tax basis in his Sooner stock is $124,500. (Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign.)

a. How much of the $528,000 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 =

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 $528,000 distribution is treated as a dividend to Boomer?
	Boomer reports a dividend of $51,000.
	He first computes balance in E&P as of June 30 by allocating the deficit in current E&P pro rata over the year. The deficit in current E&P on June 30 is negative $213,000,computed as [($426,000) × 6/12]. Hence, accumulated E&P as of June 30 is $51,000, computed as$264,000 ? $213,000
	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 $124,500 less the lesser of the distribution in excess of accumulated E&P ($477,000) or his basis in the Sooner stock ($124,000). The remaining $353000(477000-124000) is treated as gain from sale of the Jayhawk stock (capital gain).
	c. What is Sooner’s balance in accumulated E&P on the first day of next year?
	Sooner’s balance in accumulated E&P as of January 1 of next year is computed as follow
	Opening E & P	$    264,000.00
	Current Negative E & P	$ (426,000.00)
	Dividend Distributed	$    (51,000.00)
	Accumulated E&P, end of the year	$ (213,000.00)