Stacey and Eva 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 Eva on May 1. If Parakeet's current E & P is $60,000, how much is allocated to Eva'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 cash distribution first, she is deemed to have received the first $60,000 of Parakeet's E&P. This leaves $290,000 ($350,000 – $60,000) of current E&P available for allocation to Eva's distribution.

Eva owns one-half of the stock so she will receive one-half of the remaining E&P available for distribution which is $145,000 ($290,000/2). However, her actual distribution is $150,000 which exceeds her portion of the remaining E&P by $5,000. This excess is treated as a return of capital to Eva and therefore, is not taxable.

Therefore, the amount of current E&P allocated to Eva's distribution is $145,000 - $5,000 (return of capital) = $140,000.

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