Stacey and Andrew each own one-half of the stock in Parakeet Corporation,a calendar year taxpayer.Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Andrew on May 1.If Parakeet's current E & P is $60,000,how much is allocated to Andrew's distribution?
A)$5,000
B)$10,000
C)$18,000
D)$30,000
E)None of the above

Question

Quizplus · Accepted Answer

Since Stacey received a distribution before Andrew, the distribution will be deemed to have come from Stacey's share of the E&P first. Stacey's $350,000 distribution exceeds her share of the E&P (1/2 of $60,000 = $30,000), so $30,000 will be allocated to her and the remaining $30,000 will be allocated to Andrew. Therefore, Andrew's distribution of $150,000 is reduced by $30,000, leaving $120,000. Half of that ($60,000) is allocated to Andrew's share of the E&P, and the other half is a return of Andrew's basis in the stock. Therefore, Andrew's taxable dividend is $60,000, and the answer is C ($18,000).

Stacey and Andrew Each Own One-Half of the Stock in Parakeet