At the beginning of the current year, Doug and Alfred 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

Question

to Alfred) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred). Kevin has dividend income of:
a. $150,000.
b. $140,000.
c. $110,000.
d. $70,000.
e. None of the above.

Answer 1

c
RATIONALE: Since current E & P is allocated on a pro rata basis to distributions made during the year, one-half ($140,000) is applied to the November 1 distribution. Of this amount, $70,000 is assigned to Kevin. The $240,000 of accumulated E & P is allocated chronologically, so that $160,000 is applied to the February distribution [the amount not covered by current E & P ($300,000 distribution – $140,000 current E & P)] and the remaining $80,000 goes to the November distribution. Kevin's share of the accumulated E & P allocated to the November distribution is one-half, or $40,000 . Thus, of the $150,000 received by Kevin, $110,000 is deemed distributed from E & P ($70,000 current E & P + $40,000 accumulated E & P) and is taxable as a dividend, while the remaining $40,000 is a nontaxable recovery of capital.