Question

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

(a)	Effect of the distribution by Tulip Corporation on Anne
	Total Distribution = $ 300,000
	Dividend Income for Anne = $ 195,000 ( 390,000 x 50% )
	Return on Capital for Anne = $ 65,000 ( To the extent of Basis )
	Capital Gain for Anne = $ 40,000 ( 300,000 - 195,000 - 65,000 )
(b)	Effect of the distribution by Tulip Corporation on Tom
	Total Distribution = $ 300,000
	Dividend Income for Tom = $ 195,000 ( 390,000 x 50% )
	Return on Capital for Tom = $ 105,000 ( 300,000 - 195,000 )