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ms500
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| Posted: 08 Jul 2009 at 22:24 | IP Logged
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Hi- distribution of dividend
Kent Corp. is a calendar year accrual basis C corporation. In 2004, 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, 2004 $500,000
Accumulated earnings and profits at January 1, 2004 125,000
Current earnings and profits for 2004 (from operations) 60,000
What was taxable as dividend income to Reed for 2004?
a. $60,000
b. $150,000
c. $185,000
d. $200,000
Ans is D) 200,000
It is taxable to the extent that Kent had current earnings ($60,000)
plus accumulated earnings and profits ($125,000) plus any gain
generated on the distribution itself ($50,000); thus the dividend is
taxable to the extent of $200,000.
I agree with above explanation, but this answer is conflicting with
Gleim's answer, which is C) 185,000, as per Gleim-corporation will
recognizes gain as if property were sold, since share holder recd
200,000 distribution, it taxable to the extent of $ 185000 (125+60)
& balance is return of capital
Appreciate if some one will verify above
Thanks
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bala
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| Posted: 08 Jul 2009 at 22:47 | IP Logged
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I agree with Gleim, ans should be $185000, dividend taxable to the extent of current and accumulated earnings.
appreciate if someone can confirm.
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arushi_13
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| Posted: 08 Jul 2009 at 22:52 | IP Logged
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I agree with Gleim too. Actually wiley gives the same answer.
My reason:
Accumulated earnings and profits at January 1, 2004 125,000
Current earnings and profits for 2004 (from operations) 60,000
The CEP for 2004 is 60,000 which included the gain from the distribution of appreciated property(200k-150k). Hence, dividend taxable to the shareholder = 185k.
Note: However, if the Q said that CEP for 2004 before distribution is 60k then the answer would be 200k as then the total of AEP and CEP would be 125k+60k+50k=235k.
Ms500 what is the source of this Q?
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ms500
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| Posted: 08 Jul 2009 at 23:18 | IP Logged
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Thanks Arushi & Bala
Your logic is correct, ans taxable dividend should be 185000 as it is taxable to the extent of current & accumulated earnings.
This question is from Gleim- unit 17- source CPA 595 TMG-24
Once again thanks to both you for verifying above
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bryris
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| Posted: 08 Jul 2009 at 23:20 | IP Logged
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Would CEP (from operations) be considered to include the gain on a distribution?
I hope I don't see this on the actual test. I sort of disagree with Gleim on this because it specifically says "from operations".
Further more, EP increases by the after tax gain. So, it would be incorrect to add the 50k gain to EP.
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Topic: Distribution of Dividend
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