Jerry is the sole shareholder of Bluejay Corporation, a calendar year C corporation. As of January 1, 2017, Bluejay has a deficit of $50,000 in accumulated E & P. During 2017, it has current E & P of $300,000 and distributes a cash dividend of $400,000 to its shareholder. As of January 1, 2017, Jerry's basis in the Bluejay stock is $75,000. One result of these transactions is:

Question

Quizplus · Accepted Answer

The $400,000 dividend exceeds the current E & P of $300,000, so it is classified as a dividend out of accumulated E & P. The amount of the dividend equals the accumulated E & P of $50,000 plus the excess distribution of $350,000. The dividend income to Jerry is the amount of the distribution in excess of his basis in the stock, which is $225,000 ($400,000 - $75,000). Therefore, Choice B is correct.Choices A, C, and D are incorrect because they do not reflect the correct tax treatment of the transaction.

Jerry Is the Sole Shareholder of Bluejay Corporation, a Calendar