[gee]

Hi,

It would be great if you can advise me to approach the below question.. A suggestion of how to approach would help as I cannot expect the answer.

A corporation has E&P of $200,000. It’s accumulated E&P as of January 2012 was $300,000. It made quarterly cash distributions of $160,000 to its shareholders during 2012. What are the tax consequences to A,B,C and D in this situation –

A owns 80% of the company’s stock and basis is 80,000. B owns 20% of company’s stock and basis is $20,000. After receiving the second quarterly distribution, A sells one-half of stock to C for $500,000. Thereafter A sells remaining stock to D for $530,000 after receiving the third quarterly distribution.

Please advise.

regards

[Anonymous]

Distribution:

1st quarter: dividend 160 (50 from CEP, 110 from AEP)-CEP goes pro rata and AEP goes chronicle order

2nd quarter: dividend 160 (50 from CEP, 110 from AEP)

3rd quarter: dividend 130 (50 from CEP, 80 from AEP) & return of basis 30

4th quarter: dividend 50 (50 from CEP, AEP gone) & return of basis 110

Analysis:

After 1st distribution, A receives dividend 128 (160*80%) and B receives 32 (160-128).

Result: A recognizes dividend 128. B recognizes dividend 32. A’s stock basis is 80. B’s stock basis is 20.

After 2nd distribution, A receives dividend 128 (same as above) and B receives 32 (same as above). A then sells 50% stock to C for 500, the basis of stock is 40 sold and 40 left (80*50%). Upon such sale, A recognizes gain 460. *C Corporation isn’t similar to S Corp or partnership, in which a cash distribution normally has something to do with basis.

Result: A recognizes dividend 128 and gain on sale 460. B recognizes dividend 32. A’s stock basis is 40. C pays 500 for the stock so C’s basis is 500.

After 3rd distribution, A receives dividend 52 (40%*130), B receives 26, and C receives 52. A’s basis decreases from 40 to 28 by 12 (30*40%), B’s basis decreases from 20 to 16 by 4 (20*20%), and C’s basis decreases from 500 to 488 by 12 (same as A). A then sells everything he/she has to D for 530. A’s basis is 28 so A recognizes a gain of 502 on the sale.

Result: A receives dividend 52 and recognizes gain 502, B receives dividend 26, and C receives dividend 52. A’s basis is 0, B’s basis is 16, and C’s basis is 488. D pays for the stock so D’s basis is 530.

After 4th distribution, B receives dividend 10 (50*20%), C and D each receives dividend 20 (40%*50). B’s basis decreases from 16 to 0 by 16 (110*20%>16, *basis can’t be below 0), C’s basis decreases from 488 to 444 by 44 (110*40%), and D’s basis decreases from 530 to 486 by 44 (same as C). Because B’s receives more than his/her basis, a gain is recognized at 6 (110*20%-16)

Results: B recognizes a dividend 10, C and D each recognizes dividend 20.

Final results:

A’s dividend recognition = 128 + 128 +52 = 308

A’s gain recognition = 962

B’s dividend recognition = 100

B’s gain recognition = 6

B’s basis = 0

C’s dividend recognition = 72

C’s basis = 444

D’s dividend recognition = 20

D’s basis = 486

Whats the answer? Is this on the textbook?

[Anonymous]

I think your 3rd quarter math may be off?! The first 2 quarters is a dist of $320,000 which leaves $180,000 left in E+P. The third quarter dist should be all E+P aka a div of $52,000 for A, $32,000 for B and $52,000 for C.

A recognizes the $490,000 gain from the sale.

Q4 There is $20,00 of the $160,000 dist that is still part of E+P (40%=$8,000 for C &D and 20%=$4,000 for B)

A doesnt get anything as he is liquidated, B gets a div of $4,000 return of basis of $20,000 and a cap gain of $8,000, C gets a div of $8,000 and return of basis of $56,000 and D gets a div of $8,000 and return of basis of $56,000.

So Final results:

A Divs= $128 +128+52

A Gain recogn = $950

B Div = $32+32+32+4

B return of basis = $20,000

B cap gains recogn = $8,000

C Div = $52 +8

C Return of basis = $56,000

D Div = $8

D Return of basis = $56,000

[gee]

hi,

thanks! will read through and understand..

I came across this question somewhere so I don't know the answer..

[Anonymous]

my answer is wrong don't use it, forgot to spread out Current E+P equally and use Accum E+P chronologically..

[gingercpa]

dang…..that big calculation????

AUD:78-5/13
FAR:84-10/20
REG:79- 12/5
BEC:Feb
CAL Candidate

[Author]

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