1. Aaron and Michele, equal shareholders in Cavalier Corporation, receive $25,00
ID: 2480205 • Letter: 1
Question
1. Aaron and Michele, equal shareholders in Cavalier Corporation, receive $25,000 each in distributions on December 31 of the current year. During the current year, Cavalier sold an appreciated asset for $60,000 (basis of $15,000). Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year, with interest payable at a rate of 6 percent. Before considering the effect of the asset sale, Cavalier’s current year E & P is $40,000 and it has no accumulated E & P. How much of Aaron’s distribution will be taxed as a dividend?
a. $0
b. $20,000
c. $25,000
d. $42,500
(Answer is c. show work on how to get to this answer)
2. Tracy and Lance, equal shareholders in Macaw Corporation, receive $600,000 each in distributions on December 31 of the current year. Macaw's current year taxable income is $1 million and it has no accumulated E&P. Last year, Macaw sold an appreciated asset for $1,200,00 (basis of $400,00). Paymend for one-half of the sale of the asset was made this year. How much of Tracy's distribution will be taxed as a dividend?
a. $0
b. $300,000
c. $500,000
d. $600,000
(Answer is b. show work on how to get to this answer)
3. Robin Corporation, a calendar year taxpayer, has a deficit in current E&P of $200,000 and a $580,000 positive balance in accumulated E&P. If Robin determines that a $700,00 distribution to its shareholders is appropriate at some point during the year, what is the maximum of the distribution that could potentially be treated as a dividend?
a. $0
b. $380,000
c. $480,000
d. $580,000
(Answer is d. show work on how to get to this answer)
For all three questions please show your work and show how these answers were calculated. Thank you!
Explanation / Answer
Answer:1 The aggregate amount of current and accumulated E&P is (40000+0)=$40000. So, distribution of $25000 is trated as dividend.
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