[goodluck2everyone]

Paul Benson and Arthur Kronk each own one-half of the stock of Bekro Corporation, which has earnings and profits of $15,000. Bekro distributes property with a fair market value of $24,000 to its stockholders, each stockholder receiving property with a fair market value of $12,000. The gross amount reportable by each stockholder as a dividend is

A. $0

B. $ 4,500

C. $ 7,500

D. $12,000

Answer C is correct. The amount of distribution is the $24,000 FMV of the property distributed. The $24,000 will be a dividend to the extent of the corporation’s earnings and profits of $15,000. Since each shareholder received half the property, each shareholder would report $15,000 / 2 = $7,500 as a dividend.

I got it right but the explanation is confusing. I assumed the 24k distribution would just decrease the basis and the net income would be divided between the shareholders as a dividend but what the heck is going on with that answer explanation?

BEC- 80
REG- 68, 71, July
AUD- 61 , 84
FAR- -- 75 🙂

[Anonymous]

The distribution has two major pieces. Dividend and return of capital. The question only is asking about the dividend part and not the return of capital part.

Any distribution above earnings and profits + retained earnings is considered a return of capital. Since retained earnings is not mentioned it is assumed to be zero.

So we have $15,000 worth of earnings but a $24,000 distribution. $15,000 would then be a dividend to the extent of earnings and the $9,000 is return of capital.

Since $15,000 is dividend, and each stockholder is entitled to half, $7,500 is the correct answer.

[Mr. Tran]

Think

-Dividend

-Return of capital

-Capital gain

Dividend –>Excess of E&P = Return of capital –>

Excess distribution to Return of capital –>Capital gain distribution.

[goodluck2everyone]

so each shareholder's basis would then decrease by $4,500?

BEC- 80
REG- 68, 71, July
AUD- 61 , 84
FAR- -- 75 🙂

[Anonymous]

They each received a return of capital of $4,500.

[peteymit]

Yes. Their respective bases are reduced by the $4,500 per.

[goodluck2everyone]

thanks

reg is definitely my weakest area so I'm having a hard time grasping the info

BEC- 80
REG- 68, 71, July
AUD- 61 , 84
FAR- -- 75 🙂

[Author]

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