[PEGGY]

Kent Corp. is a calendar-year, accrual-basis, C corporation. In the current year, 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 $500,000
Accumulated earnings and profits at
January 1 125,000
Current earnings and profits, including
the effects of this distribution 60,000

What was taxable as dividend income to Reed for the current year?

The answer is 185,000

Here is the explanation:
When a corporation makes a nonliquidating distribution of property to a sole shareholder, it is considered a dividend.

Accumulated earnings and profits at January 1 $125,000
Plus the current earnings and profits 60,000
Total earnings and profits and maximum taxable dividend $185,000
========

The taxable dividend income to Reed for the current year is $185,000, which is 100% of the earnings and profits of the corporation.

My question is, since the corporation is distribution an asset with fmv over its basis, the difference should be added back to the cep. Therefore 200k-150k=50k should be added back to the cep and the cep will be 60k+50K=110K. Along with the 125k of AEP, there should be enough E&P to make the distribution of 200k, doesn’t it make the total 200k as taxable dividend???

[PEGGY]

oh, i got it. CEP includes the effects of the distribution.

[Author]

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