Question

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.

Answer 1

The distributions to Larry and Ed are analyzed against Brown Corporation's E & P and are considered dividend income. The entire distribution amounts received by both shareholders are taxable as dividends. Larry recognizes a capital gain of $70,000 from the sale of his stock to Ed.

Step-by-step explanation:

The student's question involves several aspects of business finance, including earnings and profits (E & P), dividend income, and capital gains. The distributions made by Brown Corporation to Larry and Ed are analyzed based on the accumulated and current E & P to determine the taxable portion as dividend income. Larry's $450,000 distribution would first be offset by the $120,000 of accumulated E & P, then current E & P up to the distributed amount. Since the current E & P far exceeds the distribution, the entire $450,000 distribution is considered dividend income. Ed's $150,000 distribution would similarly be considered dividend income, as there is still enough current E & P to cover the distribution. Regarding Larry's sale of stock to Ed, Larry's basis in the stock was $200,000, and he sold it for $270,000, thus realizing a capital gain of $70,000.