Question

Holbrook, a calendar year S corporation, distributes $15,000 cash to its only shareholder, Cody, on December 31. Cody's basis in his stock is $20,000, Holbrook's AAA balance is $8,000, and Holbrook holds $2,500 AEP before the distribution. According to the distribution ordering rules, complete the chart below to indicate how much of the $15,000 is from AAA and AEP as well as how Cody's stock basis is affected.

Answer 1

AAA account balance after distribution is

0

AEP account balance after distribution is

0

Cody’s stock basis $7,500

Step-by-step explanation:

AAA account

Distribution from Account

8,000 not taxable

Effect on Stock Basis

(8,000)

Balance after Distribution

0

AEP account

Distribution from Account

2,500 is not a taxable dividend and it does not tend to affect stock basis because it is from a previous C-corporation

Effect on Stock Basis

0

Balance after Distribution

0

Cody’s stock basis

Distribution from Account

4,500 not taxable

Effect on Stock Basis

(4,500)

Balance after Distribution

20,000-8,000-4,500= $7,500