Problem 13-16 (LO. 1, 3) Larry, the sole shareholder of Brown Corporation, sold
ID: 2526468 • Letter: P
Question
Problem 13-16 (LO. 1, 3)
Larry, the sole shareholder of Brown Corporation, sold his stock to Ed on July 30 for $270,000. Larry's basis in the stock was $200,000 at the beginning of the year. Brown had accumulated E & P of $120,000 on January 1 and has current E & P of $240,000. During the year, Brown made the following distributions: $450,000 cash to Larry on July 1 and $150,000 cash to Ed on December 30.
a. How much of the current E & P is allocated to Larry’s distribution?
$
b. How much of the current E & P is allocated to Ed’s distribution?
$
c. How much of the $450,000 distribution is taxed as dividend income to Larry?
$
d. How much of the $150,000 distribution is taxed as dividend income to Ed?
$
e. Larry recognizes a capital gain of $ on the sale of the stock.
Explanation / Answer
Answer
a . current E&P allocated to larry = ( current E&P * distribution to larry ) / total distribution
= (240000 * 450000 ) / 60000
= 180000
b. current E&P allocated to ED = ( current E&P * distribution to ED ) / total distribution
= ( 240000 * 150000 ) / 600000
= 60000
c . dividend income to larry = current E&P + accumulated E&P
= 180000 + 120000
= 300000
d . the 150000 distribution is taxed as dividend income to ED = 60000
outstanding 90000 decrease to stock basis
e . capital gain = sales price - remaining basis
= 270000 - 120000
= 150000