Question

Jayhawk Company reports current E&P of $502,500 and accumulated E&P of negative $350,000. Jayhawk distributed $592,500 to its sole shareholder, Christine Rock, on the last day of the year. Christine’s tax basis in her Jayhawk stock is $65,250. (Leave no answer blank. Enter zero if applicable. Negative amounts should be indicated by a minus sign.)

How much of the $592,500 distribution is treated as a dividend to Christine?

What is Christine’s tax basis in her Jayhawk stock after the distribution?

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

Answer 1

In terms of dividend given,the total amount of dividend paid to Christine would be $5,02,500. This amount has been arrived from the company's E&P as this amount is reserved to be paid as dividend to the shareholders. Hence out of $592,500, the amount of $502,500 would be treated as dividend paid to Christine.

Christine has been paid an excess E&P of $592,500-$502,500 which is $90,000. Christine capital gains from selling the stock would be $90,000-$65250 that is $24,750. Hence after diustribution, the amount of capital gain that is $24,750 would be treated for tax basis.

The current year E&P amount is reduced to $0 for the first day of next year and amount of accumulated E&P will be carried forward. Hence, Jayhawk's balance in accumulate E&P on the first day of next year would be ($350,000).