At the beginning of the current year, both Doug and Amelia each own 50% of Amaryllis Corporation (a calendar year taxpayer). In July, Doug sold his stock to Kevin for $140,000. At the beginning of the year, Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions). Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Amelia) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Amelia). Kevin has dividend income of:
A) $150,000.
B) $140,000.
C) $110,000.
D) $70,000.
E) None of these.

Question

Quizplus · Accepted Answer

Kevin's dividend income is calculated based on the E&P at the time of the distribution he was part of, which is the November 1 distribution. The total E&P before any distributions was $280,000. The February distribution of $300,000 would have reduced the E&P, but since Kevin was not a shareholder at that time, we only consider the E&P available at the time of his distribution. The E&P available for Kevin's distribution would be the starting E&P minus the February distribution that exceeded the starting E&P, leaving $220,000 ($280,000 - $60,000) before the November distribution. Since Kevin received $150,000, but only $220,000 is available for distribution, his dividend income is limited to his proportional share of the E&P, which is $110,000, as the remaining $40,000 ($150,000 - $110,000) would be a return of capital or potentially capital gain if it exceeds his basis in the stock.

At the Beginning of the Current Year, Both Doug and Amelia