Question

Allocating Distributions.

AB Corp has 1,000 shares outstanding and two equal shareholders, Allison and Bella. Bella has a basis of $5,000 in her 500 shares and Allison has a basis of $2,500 in her 500 shares, both owners purchased their shares 3 years ago. Determine the tax consequences of the following distributions to the shareholders and to AB Corp.

A.AB Corp has accumulated E&P of $5,000 and current E&P of $3,000 and makes a distribution of $10,000 on December 31^st of the tax year ($5K to each shareholder).

Answer 1

Allison
Total Distribution received	5,000
Tax Consequences
Dividend Income	$ 4,000	=(5000+3000)/2
Return on Capital	$ 1,000	=5000-4000
Revised Basis	$ 4,000	=5000-1000
Bella
Total Distribution received	5,000
Tax Consequences
Dividend Income	$ 4,000	=(5000+3000)/2
Return on Capital	$ 1,000	=5000-4000
Revised Basis	$ 1,500	=2500-1000