Corporation Property Distribution

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  • #3230136

    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?

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