Question

33. Hawkeye Company reports current E&P of $300,000 this year and accumulated E&P at the beginning of the year of $200,000. Hawkeye distributed $400,000 to its sole shareholder, Ray Kinsella, on December 31 of this year. Ray’s tax basis in his Hawkeye stock is $75,000.

a) How much of the $400,000 distribution is treated as a dividend to Ray?

b) What is Ray’s tax basis in his Hawkeye stock after the distribution?

c) What is Hawkeye’s balance in accumulated E&P as of January 1 of next year?

Answer 1

a) How much of the $400,000 distribution is treated as a dividend to Ray?

Ans: $ 400,000

( All $400,000 is treated as a dividend because the distribution is less than the company’s total earnings and profits of $500,000)

b) What is Ray’s tax basis in his Hawkeye stock after the distribution?

Ans: $ 75,000

( Ray’s tax basis in his Hawkeye stock remains $75,000)

c) What is Hawkeye’s balance in accumulated E&P as of January 1 of next year?

Ans: $100,000

( Accumulated E&P as of January 1 is $100,000, computed as $500,000 − $400,000.)