Homework Answers
Answer -
Pam has the following:
| Dividend income | $80000 |
| Capital gain | $9000 |
| Stock basis after distribution | $0 |
Jon has the following:
| Dividend income | $80000 |
| Capital gain | $0 |
| Stock basis after distribution | $6000 |
Explanation:
Here,
At the end of the year, Blue Corporation distributes $200000 ($100000 each) to its equal shareholders, Pam and Jon.
The current E & P is distributed equally to Pam and Jon, $30000 each ($60000 / 2).
The accumulated E & P is then distributed as well, $50000 each ($100000 / 2).
These dividends are taxed at the reduced tax rate available to all individuals. This leaves a return of capital $20000 [$100000 - ($30000 + $50000)] to each shareholder.
Because Pam has a stock basis of $11000, Pam recognizes a taxable gain of $9000 ($20000 - $11000), and Pam stock basis is reduced to zero.
Jon does not recognize a gain. However, his stock basis is reduced to $6000 ($20000 - $26000).
| Pam | Jon | |
| Total distribution | $100000 | $100000 |
| Less: Dividend income | $80000 | $80000 |
| $20000 | $20000 | |
| Less: stock basis | $11000 | $6000 |
| Capital gain | $9000 | $0 |
| Stock basis after distribution | $0 | $6000 |
Add Answer to:
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