On January 1,2010,Kinney,Inc. ,an electing S corporation,has $4,000 of AEP and a balance of $10,000 in AAA.Kinney has two shareholders,Erin and Maine,each of whom owns 500 shares of Kinney's stock.Kinney's 2010 taxable income is $5,000.Kinney distributes $6,000 to each shareholder on February 1,2010,and distributes another $3,000 to each shareholder on September 1.How is Erin taxed on this distribution?

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The distribution on February 1, 2010, is a dividend to the extent of AAA, which is $10,000. Thus, $5,000 of the distribution is a dividend to each shareholder. The distribution on September 1, 2010, is a distribution of AEP to the extent of AEP, which is $4,000. Thus, $2,000 of the distribution is a distribution of AEP to each shareholder. Therefore, Erin is taxed on $1,000 of dividend income and $2,000 of AEP, for a total of $3,000.