At the beginning of the current year,Dan and Andy each own 50% of Swallow Corporation.In July,Dan sold his stock to Kim for $140,000.At the beginning of the year,Swallow Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions).Swallow distributed $300,000 on March 10 ($150,000 to Dan and $150,000 to Andy)and distributed another $300,000 on October 1 ($150,000 to Kim and $150,000 to Andy).Kim has dividend income of:
A)$70,000.
B)$110,000.
C)$140,000.
D)$150,000.
E)None of the above.

Question

Quizplus · Accepted Answer

- Dan and Andy each owned 50% of Swallow Corporation at the beginning of the year, which means the accumulated E&P of $240,000 is split equally between them ($120,000 each).
- Dan sold his stock to Kim in July, so Dan is not entitled to any distributions for the rest of the year.
- Swallow made two distributions during the year: one in March and one in October. 
- The March distribution of $150,000 to each of Dan and Andy used up all of the accumulated E&P, so the distribution is not taxable to the shareholders.
- The October distribution of $150,000 to Andy and $150,000 to Kim will be taxable to the shareholders because the current E&P of $280,000 is higher than the distribution amount ($300,000). 
- Andy's taxable distribution amount is $150,000, and Kim's taxable distribution amount is also $150,000 since she bought Dan's share of the company and is entitled to his share of the distribution. 
- Therefore, Kim's dividend income for the year is $150,000.

At the Beginning of the Current Year,Dan and Andy Each