Question

Aaron and Michele, equal shareholders in Cavalier Corporation, receive $25,000 each in distributions on December 31 of the current year. During the current year, Cavalier sold an appreciated asset for $60,000 (basis of $15,000). Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year with interest payable at a rate of 6 percent. Before considering the effect of the asset sale, Cavalier's current-year E & P is $40,000 and it has no accumulated E & P.

Required:
How much of Aaron’s distribution will be taxed as a dividend?

Answer 1

Cavalier Corporation

Aaron’s distribution that will be taxed as a dividend is:

= $25,000

Step-by-step explanation:

a) Data and Calculations:

Amount received in distributions by Aaron and Michele each = $25,000

Proceeds from the sale of an appreciated asset = $60,000

Proceeds to be received 50% in the next year = $30,000

Proceeds to be received 50% in the second year = $30,000

Basis of asset = $15,000

Capital gains = $45,000 ($60,000 - $15,000)

Cavalier's current-year E & P = $40,000

Accumulated E & P = $0