18 Corporate Nonliquidating Distributions Hawkeye Company reports current E&P; o

Question

18 Corporate Nonliquidating Distributions Hawkeye Company reports current E&P; of $300,000 this year and accumulated E&P; at the beginning of the year of $200,000. Hawkeye distributed $400,000 to its sole shareholder, Ray Kinsella, on December 31 of this year. Ray's tax basis in his Hawkeye stock is $75,000. a. How much of the $400,000 distribution is treated as a dividend to Ray? b. What is Ray's tax basis in his Hawkeye stock after the distribution? c. What is Hawkeye's balance in accumulated E&P; as of January 1 of next year? Jayhawk Company reports current E&P; of $300,000 and accumulated E&P; of negative $200,000. Jayhawk distributed $400,000 to its sole shareholder, Christine Rock, on the last day of the year. Christine's tax basis in her Jayhawk stock is $75,000. a. How much of the $400,000 distribution is treated as a dividend to Christine? b. What is Christine's tax basis in her Jayhawk stock after the distribution? c. What is Jayhawk's balance in accumulated E&P; on the first day of next year?

Explanation / Answer

1a) The entire amount of $400000 will be treated as dividend as the company has earnings worth $500000. So any amount distributed out of earnings will be regarded as dividends.

1b) The tax base will stand at $75000. The amount which he has received is dividend. He has not sold any part of his assets and hence value will still remain at $75000.

1c) The total amount of E&P was $500000 before distribution and after distributing $400000, the balance would be $100000

2a) Since E&P of this year stands at $300000 and the accumulated loss of previous year stands at $200000, the balance in E&P stands at $100000. So out of $400000, only $100000 will be treated as dividend.

2b) Since the tax base before dividend was $75000. since only $100000 remains after considering profit of this year. so the amount of $400000, $100000 will be treated as dividend and the balance will be as capital profit, so the tax base would be $400000-$100000-$75000 = -$225000.

2c) The tax base would be nil. As profit of $300000 and loss of $200000, leaves only $100000 and the company has distributed $400000 as dividend so $100000 is from Profits.

3a) The redemption will be treated as Capital gains because the company is returning her capital back. irrespective of the source of the redemption. the amount of capital gains would be $25000 - $5000 = $20000*500 = $10000000.

3b) The income tax basis for remaining shares would remain unchanged as the remaining shares are not sold.

3c) The total amount in E&P would be $10000000 + $50000000 = $60000000. The balance after redemption would be $60000000 - (500*$25000) = $47500000

3d) The redemption is not a dividend. since she is selling out her shares. She's not receiving return on shares. She's getting the money in exchange of shares. It is actually a exchange.

4a) he will not recognize any dividend since he is receiving a share as dividend and not any dividend in money. So eventually his share price would go down to adjust for the increase in number of shares.

4b) Since she is receiving a stock as dividend , so the tax base for existing shares would not chnage.

4c) If she was offered cash then $100 for 10 shares would be treated as dividend income and the amount of $100*100 = $10000. Her tax base for the existing shares would remain unchanged as dividends will be taxed seperately.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.