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 Topic: Question with two different answers ( Topic Closed)
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Khan_Windsor
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Joined: 18 Oct 2007
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| Posted: 16 Jul 2012 at 20:27 | IP Logged
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Kent Corp. is a calendar year accrual basis C corporation. In Year 1, Kent made a nonliquidating distribution of property with
an adjusted basis of $150,000 and a fair market value of $200,000 to Reed, its sole shareholder.
The following information pertains to Kent:
Reed's basis in Kent stock at January 1, Year 1
Accumulated earnings and profits at January 1, Year 1
Current earnings and profits for Year 1 (from operations)
What was taxable as dividend income to Reed for Year 1?
a. $60,000
b. $150,000
c. $185,000
d. $200,000
PLEASE HELP, becker answer is 200k but in wiley book the answer is 185.... i don't know which answer to go with.. please help!!!!
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nambivar
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| Posted: 20 Jul 2012 at 22:19 | IP Logged
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Khan_Windsor : For me, the important point to note: the question asks for dividend income for Reed, the shareholder (and not the amount of distribution to Reed).
When I am clear on this, it is easy to apply the principles to calculate dividend income to the shareholder as follows: what is the value of distributions received by Reed: 200,000;
How should this 200,000 be treated:
a) as dividend income to the extent of current earnings and profits, here 60,000,
b) as dividend income to the extent of accumulated earnings and profits, here it is 125,000; these make a total of 185,000.
The amount distributed over and above a) and b) is 15,000 is treated as non-taxable for Reed and it goes to reduce the tax basis of Reed from 500,000 to 485,000.
-=-=
[If the distribution was higher, to wipe out this 500,000 than it means Reed got back his entire basis in the corporation and the surplus will be treated as capital gain in his hands. This problem does not concern that aspect.]
-=-=
If the question is what is the amount of distribution to Reed, the answer would be 200,000 because the principle is: The amount of distribution to a shareholder is the cash plus the FMV of other property received, reduced by liabilities assumed and here nothing is told about liabilities.
-=-=
Hope the above helps.
I used Wiley book, focus notes, software and Gleim book and software, and DVD by Phil Yaeger.
-===
Passed all 4 papers in 2011
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Fella
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| Posted: 31 Jul 2012 at 17:09 | IP Logged
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to remember it: when paid out first deduct from Current E&P
then from accumulated E&P. All these added up = your
dividend income. If they pay out more than these two
amounts put together then it's reduction in the
stockholder's basis. If they pay out even more, then it's
capital gain....
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