Question

Jayhawk Company reports current E&P of $465,000 and accumulated E&P of negative $315,000. Jayhawk distributed $542,500 to its sole shareholder, Christine Rock, on the last day of the year. Christine’s tax basis in her Jayhawk stock is $76,250.

a. How much of the $542,500 distribution is treated as a dividend to Christine?

b. What is Christine’s tax basis in her Jayhawk stock after the distribution?

c. What is Jayhawk’s balance in accumulated E&P on the first day of next year?

Answer 1

a) Christine has Dividend income of $4,65,000 All of which is from the company current E&P

b)Christine reduces her tax basis in the jayhawk's stock by $76,250 to $0,which is lesser of the distribution in excess of current E&P( 77,500) or her basis in the jayhawk's stock $76,250 the remaining 1,250$ is treated as gain from sale the jayhawk's stock

c) jayhawk's has a deficit in Accumulated E&P of negative $3,15,000 Current E&P was reduced to $0,so carry over of the beginning of the year accumulated E&P