At the beginning of the current year,Doug and Alfred each own 50% of Amaryllis Corporation (a calendar year taxpayer).In July,Doug sold his stock to Kevin for $140,000.At the beginning of the year,Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions).Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Alfred) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred).Kevin has dividend income of:
A)$150,000.
B)$140,000.
C)$110,000.
D)$70,000.
E)None of the above.

Question

Quizplus · Accepted Answer

When Doug sold his stock to Kevin, Doug recognized a gain of $90,000 ($140,000 - Doug's basis of $50,000). Since Amaryllis Corporation made distributions out of its current E&P before any accumulated E&P was distributed, we know that the February 15 distribution was fully taxable to Doug and to Alfred, while the November 1 distribution was fully taxable to Kevin and to Alfred.

- For Kevin: Since Kevin received only one distribution during the current year, he received $150,000. Because Doug already received a $150,000 distribution on February 15, Kevin did not receive any of the earlier distribution. Thus, Kevin's distribution of $150,000 consists entirely of current E&P, all of which is taxable to Kevin. Kevin's dividend income is $150,000.

The choice letter is C, and the best answer is the C.

At the Beginning of the Current Year,Doug and Alfred Each