# At the start of the current year, Blue Corporation (a calendar year taxpayer) has accumulated E...

At the start of the current year, Blue Corporation (a calendar year taxpayer) has accumulated E & P of \$100,000. Blue’s current E & P is \$60,000, and at the end of the year, it distributes \$200,000 (\$100,000 each) to its equal shareholders, Pam and Jon. Pam’s stock basis is \$11,000; Jon’s stock basis is \$26,000. Complete the following table:

Pam Jon

Taxable dividend

Return of capital

Taxable gain

The given table will be completed as follows:

 Pam Jon Taxable dividend 80,000 80,000 Return of capital 11,000 20,000 Taxable gain 9,000 0

Workings:

Total E&P of the company = \$100,000 + \$60,000 = \$160,000

The company distributed \$200,000.

Out of the \$200,000 distributed by the company, \$160,000 will be considered as dividend, and the balance \$40,000 will be considered return of capital.

Pam and Jon are equal partners.

Therefore,

Taxable dividend to each = \$160,000/2 = \$80,000

Return of capital to each = \$40,000/2 = \$20,000

Now,

Pam's stock basis is \$11,000. Therefore, for Pam, return of capital will be \$11,000 and the remaining \$9,000 is taxable gain.

Jon's stock basis is \$26,000. Therefore, all of the \$20,000 will be considered as return of capital for Jon. However, his stock basis will reduce to \$6,000 (\$26,000 - \$20,000).

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