At the beginning of the current year,Paul and Yong each own 50% of Sparrow Corporation.In July,Paul sold his stock to Sarah for $110,000.At the beginning of the year,Sparrow Corporation had accumulated E & P of $200,000 and its current E & P is $240,000 (prior to any distributions).Sparrow distributed $260,000 on March 10 ($130,000 to Paul and $130,000 to Yong)and distributed another $260,000 on October 1 ($130,000 to Sarah and $130,000 to Yong).Sarah has dividend income of:

Question

Quizplus · Accepted Answer

Since current E & P is allocated on a pro rata basis to distributions made during the year,one-half ($120,000)is applied to the October 1 distribution.Of this amount,$60,000 is assigned to Sarah.The $200,000 of accumulated E & P is allocated chronologically,so that $140,000 is applied to the March distribution [the amount not covered by current E & P ($260,000 distribution - $120,000 current E & P)] and the remaining $60,000 goes to the October distribution.Sarah's share of the accumulated E & P allocated to the October distribution is one-half,or $30,000.Thus,of the $130,000 received by Sarah,$90,000 is deemed distributed from E & P ($60,000 current E & P + $30,000 accumulated E & P)and is taxable as a dividend,while the remaining $40,000 is a nontaxable recovery of capital.

At the Beginning of the Current Year,Paul and Yong Each