Hey everyone –
Question regarding S-Corp distributions with C-Corp Accumulated E&P.
From Becker Simulation:
Rogers, Inc. is an S Corporation and has previous C Corporation Earnings and Profits in the amount of $21,000. At the end of Year 5, Rogers, Inc. had an Accumulated Adjustments Account balance of $33,000. At the end of the year, Rogers made a distribution to Mary, its only shareholder. The distribution consisted of land with a FMV and adjusted basis of $78,000. Assume Mary’s basis in the corporate stock was $15,000 after any Year 5 income items but before the distribution.
Answers: As a result of the distribution, how much of the distribution is tax free to Mary? $33,000.
As a result of the distribution, how much is a taxable dividend to Mary? $21,000.
What additional amount of the remaining distribution is taxable gain to Mary? $9,000.
I know that first the distribution is taken from AAA, but I thought that it also reduces the basis in Mary's stock? So the AAA account would go down to zero, and her basis would also go down to zero (15,000 – 33,000). Then 21,000 would come out of Corporate E&P and be a taxable dividend. Then there would be no return of capital (because her basis was brought down to zero). The rest (24,000?) would be a LT capital gain.
I know that the distribution is first a tax-free distribution from AAA, but I thought that also reduces the basis. The answer from Becker states, “After accounting for the 33,000 tax free amount and taxable dividend of 21,000, the remaining distribution is 24,000. This amount is a tax free reduction of corporate stock basis until that reaches zero. Since the basis is $15,000, that amount is $15,000. This leaves the remaining 9,000 in excess of basis taxed as a Capital Gain.”
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