Renee, the sole shareholder of Indigo Corporation, sold her stock to Chad on July 1 for $180,000. Renee's stock basis at the beginning of the year was $120,000. Indigo made a $60,000 cash distribution to Renee immediately before the sale and Chad received a $120,000 cash distribution from Indigo on November 1. As of the beginning of the current year, Indigo had $26,000 in accumulated E & P and current E & P (before distributions) was $90,000. Which of the following statements is correct?

Question

Quizplus · Accepted Answer

DRenee's gain on the sale of the stock is calculated by subtracting her adjusted basis in the stock from the sale price. Her basis was $120,000, and she received a $60,000 distribution, which reduces her basis to $60,000 ($120,000 - $60,000). Selling the stock for $180,000 results in a $120,000 gain ($180,000 - $60,000). However, the distribution she received is considered a dividend to the extent of the corporation's E&P. With $26,000 in accumulated E&P and $90,000 in current E&P, the $60,000 distribution is fully covered by E&P and is thus a dividend, leaving her with a $60,000 gain on the sale of the stock.Chad's $120,000 distribution is analyzed similarly. The corporation had $116,000 in E&P ($26,000 accumulated + $90,000 current) before any distributions. After Renee's $60,000 distribution, $56,000 of E&P remains ($116,000 - $60,000). Therefore, of Chad's $120,000 distribution, $56,000 is a dividend (to the extent of remaining E&P), and the excess $64,000 ($120,000 - $56,000) is a return of capital and potentially capital gain if it exceeds his basis in the stock. However, the question only asks about the dividend income, which is $56,000, not an option provided. Thus, it seems there was a mistake in the calculation or the options provided. Given the options, D) Chad recognizes dividend income of $30,000 is incorrect based on the explanation, indicating a misunderstanding in the original explanation. The correct interpretation should focus on the dividend income recognized by Chad based on the E&P available for his distribution, but without the correct figures provided in the options, an accurate selection can't be made based on the given explanation. Therefore, the initial explanation provided was incorrect, and without accurate information or options that reflect the scenario described, a correct answer based on the provided options and scenario can't be determined.

Renee, the Sole Shareholder of Indigo Corporation, Sold Her Stock