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. $150,000
b. $200,000
c. $60,000
d. $185,000
Explanation
Choice “b” 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.
Where in the book does it say that? I am using Becker. I thought the answer is D. Basing it on the explanation, if the distribution is not property, then it would be D but if it property distribution then it would be its FMV?
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