Question

At the start of the current year, Blue Corporation (a calendar year taxpayer) has accumulated E & P of $100,000. Blue’s current E & P is $60,000, and at the end of the year, it distributes $200,000 ($100,000 each) to its equal shareholders, Pam and Jon. Pam’s stock basis is $11,000; Jon’s stock basis is $26,000. Complete the following table:

Pam Jon

Taxable dividend

Return of capital

Taxable gain

Answer 1

The given table will be completed as follows:

	Pam	Jon
Taxable dividend	80,000	80,000
Return of capital	11,000	20,000
Taxable gain	9,000	0

Workings:

Total E&P of the company = $100,000 + $60,000 = $160,000

The company distributed $200,000.

Out of the $200,000 distributed by the company, $160,000 will be considered as dividend, and the balance $40,000 will be considered return of capital.

Pam and Jon are equal partners.

Therefore,

Taxable dividend to each = $160,000/2 = $80,000

Return of capital to each = $40,000/2 = $20,000

Now,

Pam's stock basis is $11,000. Therefore, for Pam, return of capital will be $11,000 and the remaining $9,000 is taxable gain.

Jon's stock basis is $26,000. Therefore, all of the $20,000 will be considered as return of capital for Jon. However, his stock basis will reduce to $6,000 ($26,000 - $20,000).