Question

1. Allan owns all of the stock of Cady Co. The stock’s basis is $100,000. Cady Co has a total of current and accumulated earnings and profits of $50,000. CadyCo distributes $200,000 cash to Allan “with respect to his stock” (i.e., as a state law “dividend”). How is the $200,000 taxed? What is Allan’s stock basis after the distribution? Alternatively, CadyCo distributes to Allan his note to Cady Co for $200,000 borrowed from CadyCo.

Answer 1

Answer :

Cady Co has a total of accumulated and current E&P of $50,000 and Allan's stock basis in Cady co is $100,000

Out of total distribution of $200,000 amount distributed to extend of accumulated and current E &P $50,000 would be taxable dividend. The remaining $150,000 is $100,000 to the extent of stock basis of the return of capital portion of the distribution would reduce the shareholder's basis in his stocks to zero and remaining $50,000 is capital gain return of capital.

Therefore $200,000 would be taxed as follows

First $50,000 taxable as dividend.

Next $100,000 return of stock basis not taxable

Remaining $50,000 taxable as capital gain

Allan's stock basis after this distribution would be zero.

The trearment would be the same if CadyCo distributes to Allan notes borrowed from CadyCo.

Kindly Up-vote Thank You !!!