Question

Jayhawk Company reports current E&P of $377,500 and a deficit in accumulated E&P of ($275,000). Jayhawk distributed $452,500 to its sole shareholder, Christine Rock, on the last day of the year. Christine’s tax basis in her Jayhawk stock is $71,750.

a. How much of the $452,500 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 $ 377,500, all of which is from the company's current E&P.

b) Christine reduces her tax basis in the Jayhawk stock by $71,750 to $0, which is the lesser of the distribution in excess of current E&P ($75,000) { 452,500 - 377,500 }or her basis in the Jayhawk stock ($71,750). The remaining $3,250 ( 75,000 - 71,750 )will be treated as gain from sale of the Jayhawk stock (capital gain).

c) Jayhawk has a balance in accumulated E&P as of ($275,000). Current E&P is reduced to $0, leaving a carryover of the beginning of the year accumulated E&P.