[CPA so close, so far away]

This is a question from Ninja MCQ…

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?

A.
$60,000

B.
$150,000

C.
$185,000

Incorrect D.
$200,000

Ninja says the correct answer is C. However, in Becker, it states that a dividend of property increases Current Earnings and Profit by the gain. Therefore, the CE&P should increase to $110,000. That makes enough E&P for the distribution to be a “Taxable dividend” to the recipient.

Any thoughts on this?

[CPA so close, so far away]

Anyone?

Becker has this exact same question in their software, and they say the answer is $200,000.

[Holly]

What are the question numbers in both softwares?

BEC - 79
REG - 85
AUD - 5/27/16

[CPA so close, so far away]

Ninja #1307

Becker: CPA-02092

[Holly]

I just came across one with similar info 1357 in NINJA. When I finish this group of questions I'll look at those and see if anything makes sense to me.

BEC - 79
REG - 85
AUD - 5/27/16

[CPA so close, so far away]

I see from your signature that you use Becker. Tim Gearty was pretty adamant in the lectures about mentioning that as being an “exam trick.” I am fairly certain that the corporation must recognize a gain and increase their earnings and profits.

[Holly]

The NINJA one specifically says $60k including the effects of this distribution, so it wouldn't increase to $110,000 = $185K

BEC - 79
REG - 85
AUD - 5/27/16

[Julia]

I agree w $200,000. I have seen in various places the gain is added to the acc e/p.

[Holly]

@Julia the gain is added and the correct answer is $200k in Becker; however, the gain is already added in NINJA's $60k (Current earnings and profits, including
the effects of this distribution 60,000) so the total can only be $185k = dividend to shareholder to extent of total e&p. See Becker R4-66 & 67.

BEC - 79
REG - 85
AUD - 5/27/16

[Anonymous]

I agree with Holly, since 60,000 includes the effects of the distribution, if you were to add the gain of 50,000 you would be double counting, hence 185,000 makes sense.

[Author]

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