Question

11. On January 1, Tulip Corporation (a calendar year taxpayer) has accumulated E & P of $300,000. Its current E & P for the year is $90,000 (before considering dividend distributions). During the year, Tulip distributes $600,000 ($300,000 each) to its equal shareholders, Anne and Tom. Anne has a basis in her stock of $65,000, and Tom’s basis is $120,000. What is the effect of the distribution by Tulip Corporation on Anne and Tom?

Answer 1

Step 1

The question is based on the concept of finding effect of dividend distribution on tax basis on the promoters. The distribution will have dual impact ; on dividend and stock basis.

Step 2

As per the given data in question, Anne and Tom is promoters of Tulip corporation.

Dividend income for both shareholders = [Accumulated E&P + current E&P] ÷2= ($300,000+$90,000) ÷2=$195,000.

Excess Distribution of $300,000-$90,000= $210,000 reduces the stock basis in Tulip treated as capital gain.

For Anne = [($210,000 excess of E&P ÷2) –$65,000 basis]= stock basis to zero and capital gain of $40,000

For Tom =Stock basis to $15,000 = [$120,000 basis – ($210,000 excess of E&P ÷2)]