[wjsniper824]

Hi All, Let me show you these two questions from Ninja MCQ quick.

Dahl Corp. was organized and commenced operations in Year 0. At December 31, Year 5, Dahl had accu­mulated earnings and profits of $9,000 before dividend declaration and distribution. On December 31, Year 5, Dahl distributed cash of $9,000 and a vacant parcel of land to Green, Dahl’s only stockholder. At the date of distribution, the land had a basis of $5,000 and a fair market value of $40,000. What was Green’s taxable dividend income in Year 5 from these distributions?

A $9,000
B $14,000
C $44,000
D $49,000

Answer is C, Since appreciated property was distributed to Green, Dhal Corp. must recognize a gain of $35,000 (FMV $40,000 – Basis $5,000) which increases the AEP at December 31, Year 5 to $44,000 (AEP $9,000 + CEP $35,000).

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 on January 1, Year 1 125,000
Current earnings and profits for Year 1 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

Answer is C here. I am trying to figure out how these two questions are different. If we are to follow the same logic, don’t we have to add $50,000 ($200,000 – $150,000) appreciated portion of the property to AEP + CE, making them $235,000, and make entire $200,000 distribution as taxable dividend income to Reed?