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On January 1, 2010, Kinney Inc., an electing S corporation, has $4000 of AEP and a...

On January 1, 2010, Kinney Inc., an electing S corporation, has $4000 of AEP and a balance of $10,000 in AAA. Kinney has two shareholders, Erin and Maine, each of whom owns 500 shares pf Kinney's stock. Kinney's 2010 taxable income is $5000. Kinney distributes $6000 to each shareholder on Feb. 1. 2010, and distributes another $3000 to each shareholder on September 1. How is Erin taxed on this distribution?

a. $500 dividend income

b. $1000 dividend income

c. $1500 dividend income

d. $3000 dividend income

e. None of the above

Please show the work.

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Answer #1

Answer is option (c) $1500 dividend income.

Explanation-
February 1:($12,000÷$18,000)×$15,000 = $10,000

September 1:($ 6,000÷$18,000)×$15,000 = $5,000

Thus, Erin and Maine must both report dividend income of $1,000 for the February 1 distribution and $500 each for the September 1 distribution. Assuming that the shareholders have sufficient basis in their stock, both Erin and Maine each have a $7,500 return of capital from AAA.

Therefore Erin will have dividend income of $1500 to be taxed on distribution.

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