Question

35. This year, Sooner Company reports a deficit in current E&P of ($300,000). Its accumulated E&P at the beginning of the year was $200,000. Sooner distributed $400,000 to its sole shareholder, Boomer Wells, on June 30 of this year. Boomer’s tax basis in his Sooner stock is $75,000.

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

b) What is Boomer’s tax basis in his Sooner stock after the distribution?

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

Answer 1

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Answer:

a.

Compute the amount of distribution to be treated as a dividend to Mr. BM.

Step 1: Calculate deficit in current E&P (Earnings & Profits):

Step 2: Calculate the distribution out of $400,000 to be treated as dividend.

Therefore, out of distribution $400,000 to be treated as dividend.

b)

Calculate tax basis of Mr. BM in his stock after the distribution:

Here, the tax basis of Mr. BM is $75,000. Accumulated E&P is $350,000. This portion of distribution amount that is not a dividend, reduces the tax basis of BM in SN’s stock and is treated as nontaxable return of capital.

The tax basis of Mr. BM on his stock ($75,000) is lesser than the distribution and in excess of accumulated E&P that is, $275,000 . Hence, BM’s tax basis is $0. The remaining balance of accumulated E&P $275,000 is considered as capital gain.

c)

Calculate SN’s balance in accumulated E&P as on January 1, 2010.

Therefore, the balance in accumulated E&P is .