On January 1,2008,Kinney,Inc.,an electing S corporation,has $4,000 of AEP and a balance of $10,000 in AAA.Kinney has two shareholders,Erin and Maine,each of whom owns 500 shares of Kinney's stock.Kinney's 2008 taxable income is $5,000.Kinney distributes $6,000 to each shareholder on February 1,2008,and distributes another $3,000 to each shareholder on September 1.How is Erin taxed on this distribution?

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AAA is $15,000 ($10,000 + $5,000)as of December 31,2008,before taking into account the two distributions.Thus,the sum of the distributions ($18,000)exceeds Kinney's AAA by $3,000.A portion of the $15,000 AAA balance is allocated to each of the February 1 and September 1 distributions,based upon the respective sizes of the distributions,as follows.
 11ea7f05_2e94_a984_92e1_851915eb41da_TB4123_00 
 11ea7f05_2e94_d095_92e1_d9b241389507_TB4123_00 Thus,Erin and Maine must both report dividend income of $1,000 for the February 1 distribution and $500 each for the September 1 distribution.Assuming that the shareholders have sufficient basis in their stock,both Erin and Maine each have a $7,500 return of capital from AAA.