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Vebos, Inc. distributes $10,000 cash and a machine with a fair market value of $5,000 (adjusted basis to Vebos was $200) at time of distribution to its shareholder Jody. Vebos had current E&P of $100,000 at the distribution. What is the amount and character of the distribution to Jody?

User Marienke
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Final answer:

Jody, a shareholder of Vebos, Inc., received a distribution totaling $15,000, consisting of $10,000 in cash and a machine valued at $5,000. As Vebos has sufficient current E&P, the entire amount is considered a dividend for tax purposes.

Step-by-step explanation:

The distribution to Jody, the shareholder of Vebos, Inc., can be characterized as a dividend since Vebos had current Earnings and Profits (E&P) of $100,000, which is sufficient to cover the distribution.

Jody received a cash distribution of $10,000 and a machine with a fair market value of $5,000. The total value of the distribution is $15,000. The basis of the machine to Vebos was only $200, so this will result in a gain.

For tax purposes, the distribution is treated as a dividend to the extent of Vebos's current E&P. Any part of the distribution that isn't covered by E&P could then be treated as a return of capital or capital gain.

In this scenario, since the E&P can cover the full distribution, the total distribution of $15,000 would be considered dividend income to Jody.

The gain on the machine, which would be the difference between the fair market value ($5,000) and its adjusted basis ($200), is a separate issue. It would need to be recognized by Vebos, Inc. This gain does not directly impact Jody's tax treatment of the dividend distribution.

User JRazor
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