At the beginning of the current year, 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 the above.

Question

Quizplus · Accepted Answer

When Doug sold his stock to Kevin, it triggered a deemed dividend to Doug for his share of Amaryllis Corporation's accumulated E&P. 
Doug's share of accumulated E&P = $240,000 x 50% = $120,000 
Proceeds from the sale = $140,000 
Deemed dividend to Doug = $140,000 - $120,000 = $20,000 
After the February distribution of $300,000, the remaining E&P was $60,000 ($240,000 - $150,000). 
The November distribution of $300,000 first reduces the remaining E&P to zero, then any additional distributions are treated as dividends. So, the $150,000 distributed to Kevin is a dividend. 
Kevin's dividend income = $150,000 - $20,000 (deemed dividend to Doug) = $130,000 
However, Kevin is only taxed on 50% of the dividend income, as he only owned 50% of Amaryllis Corporation for half the year. 
Kevin's taxable dividend income = $130,000 x 50% = $65,000 
Therefore, the correct answer is (C) $110,000.

At the Beginning of the Current Year, Doug and Amelia