Jen,the sole shareholder of Mahogany Corporation,sold her stock to Jason on July 1 for $90,000.Jen's stock basis at the beginning of the year was $60,000.Mahogany made a $30,000 cash distribution to Jen immediately before the sale,while Jason received a $60,000 cash distribution from Mahogany on November 1.As of the beginning of the current year,Mahogany had $16,000 in accumulated E & P,while current E & P (before distributions)was $30,000.Which of the following statements is correct?

Question

Quizplus · Accepted Answer

The $30,000 in current E & P is allocated on a pro rata basis to the two distributions made during the year; thus,$10,000 of current E & P is allocated to Jen and $20,000 is allocated to Jason.Accumulated E & P is allocated in chronological order,so that all $16,000 is allocated to Jen.Therefore,the distribution to Jen is treated as a $26,000 dividend and a $4,000 reduction in stock basis.Jason's distribution consists of a $20,000 dividend and a $40,000 reduction in stock basis.Since Jen sells her stock for $90,000 and her basis immediately after the distribution is $56,000 ($60,000 original basis - $4,000 recovery of capital),she has a $34,000 gain on sale.

Jen,the Sole Shareholder of Mahogany Corporation,sold Her Stock to Jason