Renee, the sole shareholder of Indigo Corporation, sold her stock to Chad on July 1 for $180,000. Renee's stock basis at the beginning of the year was $120,000. Indigo made a $60,000 cash distribution to Renee immediately before the sale, while Chad received a $120,000 cash distribution from Indigo on November 1. As of the beginning of the current year, Indigo had $26,000 in accumulated E & P, while current E & P (before distributions) was $90,000. Which of the following statements is correct?

Question

Quizplus · Accepted Answer

Renee's realized gain on the sale of her stock is calculated as follows:
Sales price of stock: $180,000
Less: Renee's stock basis: $120,000
Less: Distribution received by Renee: $60,000
Realized gain: $0

Since Renee's realized gain is $0, her recognized gain is also $0.

Chad's dividend income is calculated as follows:
Cash distribution received by Chad: $120,000
Less: Indigo's current E&P: $90,000
Dividend income: $30,000

Therefore, Chad recognizes dividend income of $30,000.

Renee, the Sole Shareholder of Indigo Corporation, Sold Her Stock