Question

This year, Sooner Company reports current E&P of negative $478,000. Its accumulated E&P at the beginning of the year was $392,000. Sooner distributed $784,000 to its sole shareholder, Boomer Wells, on June 30 of this year. Boomer’s tax basis in his Sooner stock is $120,000. (Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign.)

a. How much of the $784,000 distribution is treated as a dividend to Boomer?
b. What is Boomer’s tax basis in his Sooner stock after the distribution?
c. What is Sooner’s balance in accumulated E&P on the first day of next year?

Answer 1

(a). Boomer reports a dividend of $

He first computes accumulated E&P as of June 30. The deficit of current E&P is allocated pro rata on a daily basis. The deficit in current E&P on june 30 is Negative $ 2,37,036 computed as ( $ 478000/365*181 days)

Therefore Accumulated E&P of June 30 is = $ 154964 (ie, $392000 - $237036)

(b). Boomers tax basis in sooners stock is $0, which is his beginning tax basis iof $2,00,000 Less the lesser of the distribution in excess of the accumulated E&P ($629036) or his basis in the sooner stock ($200000). The remaining $429036 is treated as gain from sale of stock

©Sooner’s balance in accumulated E&P on the first day of next year is computed as follows

Accumulated E&P, Beginning of the year                      $ 3,92,000

Add/(Less) : Current E&P                                              ($ 4,78,000)

Add : Dividend Paid                                                      $ 1,54,964

So, Accumulated E&P at the end of the year              $ 68,964