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At the start of the current year, Blue Corporation (a calendar year taxpayer) has accumulated E...

At the start of the current year, Blue Corporation (a calendar year taxpayer) has accumulated E & P of $290,000. Blue's current E & P is $174,000, and at the end of the year, it distributes $580,000 ($290,000 each) to its equal shareholders, Pam and Jon. Pam's stock basis is $40,600; Jon's stock basis is $162,400. How is the distribution treated for tax purposes? If an amount is zero, enter "0". Pam has the following:

Dividend income: $

Capital gain: $

Stock basis after distribution: $

Jon has the following:

Dividend income: $

Capital gain: $

Stock basis after distribution: $

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Answer #1

Distributions to the extent of E&P balances are dividend income. Total E&P balance is $464,000(290,000+174,000). Thus, each one has a $232,000 dividend income.

For Pam:

Dividend income - $232,000

Stock basis reduces to - $0

Balance distribution is capital gain - $17,400 (58,000 - 40,600)

Jon:

Dividend income - $232,000

Stock basis reduces by $58,000 to - $104,400

Capital gain - $0

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