[Lighthaven]

Hey, I’m super confused with this multiple choice question:

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 at January 1, Year 1, $125,000

Current earnings and profits for Year 1 (from operations) $60,000

What was taxable as dividend income to Reed for Year 1?

a. $200,000

b. $60,000

c. $185,000

d. $150,000

Explanation:

Choice “a” is correct. A dividend paid in property other than money is taxable to an individual taxpayer to the extent of the property’s fair market value, but not in excess of the current and accumulated earnings and profits of the distributing corporation. In this case the fair market value of the dividend is $200,000. It is taxable to the extent that Kent had current earnings ($60,000) plus accumulated earnings and profits ($125,000) plus any gain generated on the distribution itself ($50,000); thus the dividend is taxable to the extent of $200,000.

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Now I get that the gain is taxable. That makes sense. But the question didn’t ask for what amount is taxable. It asked what was taxable as dividend income. And the answer explains that it is only taxable to the extent of of current and accumulated earnings.

So…why is $185,000 not correct?

Thanks!

AUD - 83
REG - 81 (2x)
FAR - 78
BEC - 85

And that's all she wrote.

[aatoural]

I just came accross the same question. I am puzzled now.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[acctonehunnit]

Property dividends are taxable @ FMV to extent of CEP & AEP. The gain on the property is recognized by the corporation, increasing the CEP from $60k to $110k (60+50 due to the $50k gain on the property). The sum of AEP and CEP post recognition of the gain is $235k (125+110), greater than the $200k FMV of the distribution, thus the whole FMV of the distribution is treated as dividend income.

Let me know if that makes sense

[aatoural]

Also check the REG study group.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[Skynet]

When a wife gives her husband spending money,it is not taxable because technically it from his pay check which is after tax.

[Author]

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