Question

ABC Corp (ABC) was formed 15 years ago by Able & Body (2 individuals). ABC uses the cash method of accounting and reports on a calendar year basis. A & B still own 100 shs each of the 200 shs of ABC. On 3/1 of the current year, ABC distributed $40,000 in total- $20,000 each to A and B, and 9/30 of the current year, ABC distributed $70,000 in total - $35,000 each to A and B. No other distributions were made by ABC during the current year.

Assume A's adjusted basis in his ABC shs is $26,000, B's adjusted basis in his ABC shs is 40,000.

Unless otherwise stated, assume that the figure for "a/e&p" is the "accumulated earnings and profits" (or defict) of ABC as of January 1 of the current year. Assume that's the figure for "ce/p" is the "current earnings and profit" (or deficit) of ABC during the current year. Treat each situation seperatley and characterize the distributions to A & B.

a) A/e&p is $50,000 and c/e&p is $40,000.

b) A/e&p is $0 and c/e&p is $45,000.

c) A/e&p is $(90,000) and c/e&p is $40,000.

d) A/e&p is $(55,000) and c/e&p is $(30,000).

Answer 1

	ABC Corp.			A	B
	shares			100	100
01-Mar	Distribution			20000	20000
30-Sep	Distribution			35000	35000
	Adjusted basis			26000	40000
a	A/e&P	50000	26:40	19696.97	30303.03	Since adjusted basis is 26000 for A and 40000 for B
	C/e&P	40000	50:50	20000	20000	Since both A & B are holding equal no. of shares
b	A/e&P	0	26:40	0	0	Since adjusted basis is 26000 for A and 40000 for B
	C/e&P	45000	50:50	22500	22500	Since both A & B are holding equal no. of shares
c	A/e&P	-90000	26:40	-35454.5	-54545.5	Since adjusted basis is 26000 for A and 40000 for B
	C/e&P	40000	50:50	20000	20000	Since both A & B are holding equal no. of shares
d	A/e&P	-55000	26:40	-21666.7	-33333.3	Since adjusted basis is 26000 for A and 40000 for B
	C/e&P	-30000	50:50	-15000	-15000	Since both A & B are holding equal no. of shares