Maria and Christopher each own 50% of Cockatoo Corporation, a calendar year taxpayer. Distributions from Cockatoo are: $750,000 to Maria on April 1 and $250,000 to Christopher on May 1 . Cockatoo's current E & P is $300,000 and its accumulated E & P is $600,000 . How much of the accumulated E & P is allocated to Christopher's distribution?

Question

a. $0
b. $75,000
c. $150,000
d. $300,000
e. None of the above

Answer 1

b
RATIONALE: Current E & P is allocated on a pro rata basis to each distribution made during the year. Cockatoo Corporation made $1 million of distributions and Christopher's distribution represents 25% ($250,000/$1,000,000) of that amount. Consequently, Christopher receives 25% of Cockatoo's current year E & P, or $75,000 ($300,000 × 25%). Accumulated E & P is applied in chronological order beginning with the earliest distribution. Since Maria's distribution is made first, how much current and accumulated E & P belong to her? Maria should receive 75% of Cockatoo's current year E & P because she received 75% of the distributions made during the year ($750,000/$1,000,000). Consequently, $225,000 of current E & P is sourced to Maria ($300,000 × 75%). The remainder of Maria's distribution, $525,000 ($750,000 distribution – $225,000 of current E & P), is made from accumulated E & P, leaving $75,000 of accumulated E & P ($600,000 – $525,000) for Christopher's distribution.