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23 June, 15:39

Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000. On July 1, Blue distributes $250,000 to its sole shareholder, Sam, who has a basis in his stock of $52,500. As a result of the distribution, Sam has:

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  1. 23 June, 16:54
    0
    Sam's dividend income is $225,000 and has a reduction of stock basis of $27,500

    Explanation:

    From the example,

    Given that,

    Sam stock is = $52.500

    Blue corporation has deficit in accumulated E and P which is = $300,000

    Blue corporation has current E and P of = $225,000

    Blue distributes $250,000 to its shareholder on July 1st

    Therefore,

    Blue corporation has a current E & P of $225,000, to an extent, Sam has a taxable dividend. The remaining $25,000 reduces his basis stock.

    Sam has an income dividend of $225,000 and reduces his stock basis to $27,500.
  2. 23 June, 18:25
    0
    Answer: Sam will have a dividend income from Blue corporation of $225,000 and a reduction in his stock basis from $52,500 to $27,500

    Explanation:

    Since the current Earning and profit = $225,000

    Dividend income = $250,000

    Sam basis in stock = $52,500

    To calculate taxable dividend

    Dividend income - Stock basis = taxable dividend

    250,000 - 52,500 = 197,500

    To calculate reduction in stock basis

    Current E &P - taxable dividend = reduction stock basis

    225,000 - 197,500 = 27,500

    To calculate balance remaining in stock basis

    Dividend income - Current E&P = Balance in stock basis

    250,000 - 225,000 = 25,000

    Since the current E& P of Blue corporation is $225,000, as a result of this Sam dividend will be taxable by the tax authority, while the remaining balance of $25,000 will further reduce Sam stock basis from $52,500 to $27,500
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