Question

Jayhawk Company reports current E&P of $450,000 and accumulated E&P of negative $297,500. Jayhawk distributed $500,000 to its sole shareholder, Christine Rock, on the last day of the year. Christine’s tax basis in her Jayhawk stock is $48,250

1. How much of the $500,000 distribution is treated as a dividend to Christine?
2. What is Christine’s tax basis in her Jayhawk stock after the distribution?
3. What is Jayhawk’s balance in accumulated E&P on the first day of next year?

Answer 1

1. The amount of the distribution treated as a dividend to Christine is equal to $450,000.

2. The amount of Christine’s tax basis in her Jayhawk stock after the distribution is equal to $0.

3. Jayhawk's balance in accumulated E&P on the first day of next year is equal to the negative $297,500.

Step-by-step explanation:

1. How much of the $500,000 distribution is treated as a dividend to Christine?

The amount of the distribution treated as a dividend to Christine is the equal to the current E&P of $450,000 reported by Jayhawk Company.

2. What is Christine’s tax basis in her Jayhawk stock after the distribution?

This can b determined as follows:

Tax basis in Jayhawk stock after distribution = Max of (0, Current E&P + Previous tax basis - Distribution by Jayhawk') = Max of (0, $450,000 + $48,250 - $500,000) = Max of (0, - $1,750) = $0

Therefore, the amount of Christine’s tax basis in her Jayhawk stock after the distribution is equal to $0.

3. What is Jayhawk’s balance in accumulated E&P on the first day of next year?

Jayhawk's balance in accumulated E&P on the first day of next year is equal to the negative $297,500. This is because all the E&P of last year is paid as dividend.