Tracy and Lance,equal shareholders in Macaw Corporation,receive $250,000 each in distributions on December 31 of the current year.During the current year,Macaw sold an appreciated asset for $500,000 (basis of $150,000).Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year,with interest payable at a rate of 7.5%.Before considering the effect of the asset sale,Macaw's current year E & P is $400,000 and it has no accumulated E & P.How much of Tracy's distribution will be taxed as a dividend?
A)$0.
B)$200,000.
C)$250,000.
D)$425,000.
E)None of the above.

Question

Quizplus · Accepted Answer

Since Tracy and Lance are equal shareholders, they each receive $250,000 in distributions. Before the asset sale, Macaw's E&P was $400,000, and since they have no accumulated E&P, the entire distribution comes from the current year E&P. Therefore, Tracy's distribution of $250,000 will be taxed as a dividend, as it exceeds her share of Macaw's E&P. The asset sale does not change the computation of the dividend.

Tracy and Lance,equal Shareholders in Macaw Corporation,receive $250,000 Each in Distributions