Monteleon, Inc. reports positive current E&P in 2014 and positive accumulated E&
ID: 2479119 • Letter: M
Question
Monteleon, Inc. reports positive current E&P in 2014 and positive accumulated E&P at the beginning of the year of $!0,000. St. Clair Company distributed $350,000 to its shareholder, Cindy Slade on June 30, 2014 and $350,000 to Donny Smith on December 31, 2014. Cindy's tax basis in her stock is $60,000 and Donny's tax basis is $150,000. Cindy and Donny each own 50% of the company. Please show your work and explain your answer.
(a) Describe the income tax treatment of these distributions to the shareholders.
(b) What is each shareholder's basis in stock after the distribution?
Explanation / Answer
Solution.
(a) Stockholders recognize a taxable dividend to the extent a distribution is paid out of E&P. If the distribution exceeds E&P then it is treated as return of capital and reduces the stockholder's stock basis. Any amount in excess of the stockholder's stock basis is to be taxed as capital gain (Secs. 301(b)(1) and (c)).
Computation of Capital Gain
(b) The shareholder's basis in stock after the distribution of each of the shareholder is 0.
Cindy Slade Donny Smith Dividends received $350000 $350000 - Taxable dividend paid out of E&P $5000 $5000 - Return of Capital (to the extent of tax basis in stock) $60000 $150000 Capital Gain $285000 $195000