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gppg
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Posted: 11 Nov 2011 at 04:44 \| IP Logged

Hi I'm using becker review, and Ch 3: C-Corporation has been really difficult for me. I went through the lecture and the passmaster twice, still not fully understand the topic. I feel some questions from the passmaster were not explained in the text book.

Any tips or recommendations on how to study this chapter would be greatly appreciated, thanks!

WanabeACPA
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Posted: 11 Nov 2011 at 18:06 \| IP Logged

What exactly are you having trouble with? Maybe post some
questions you don't understand.

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gppg
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Posted: 11 Nov 2011 at 19:08 \| IP Logged

Here's one:

Question CPA-02092

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           ;          $500,000
Accumulated earnings and profits at January 1, Year 1           ; 125,000
Current earnings and profits for Year 1 (from operations)       60,000

What was taxable as dividend income to Reed for Year 1?

a. $60,000
b. $150,000
c. $185,000
d. $200,000

Choice "d" is correct. A dividend paid in property other than money is taxable to an individual taxpayer to the extent of the property's fair market value, but not in excess of the current and accumulated earnings and profits of the distributing corporation. In this case the fair market value of the dividend is $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.

My answer was c: $185,000, because it's the total of the accumulated and current earnings available. Based on page R3-48, when corporation distributes appreciated property, the tax result for the shareholder's dividend income is to the extent of E&P.

I don't understand why the dividend income includes the gains from the appreciated property.

Thanks.

ReRe
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Posted: 13 Nov 2011 at 21:32 \| IP Logged

You are forgetting the gain on the distribution. Because the distributed fmv exceeded the cost basis there is a gain. The dividend distributed exceeded the asset credited. If you write it out as a journal entry for the dividend distribution that the company would make, it makes a little more sense. Therefore the dividend, valued at FMV, is taxable to the extent of of current earnings, which exceeded the FMV.

clear as mud ?

gppg
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Posted: 19 Nov 2011 at 23:36 \| IP Logged

Thanks for your reply.

I thought the gain on the distribution is recognized by the corporation and not the shareholder. And I thought dividend income is limited to: current + accumulate E&P (in this case $185,000), anything over will be used to reduce shareholder basis.

sorry but still a little confused.

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