Answer:
Sam's dividend income is $225,000 and has a reduction of stock basis of $27,500
Explanation:
From the example ,
Given that,
Sam stock is =$52.500
Blue corporation has deficit in accumulated E and P which is =$300,000
Blue corporation has current E and P of = $225,000
Blue distributes $250,000 to its shareholder on July 1st
Therefore,
Blue corporation has a current E & P of $225,000, to an extent, Sam has a taxable dividend. The remaining $25,000 reduces his basis stock.
Sam has an income dividend of $225,000 and reduces his stock basis to $27,500.
Answer: Sam will have a dividend income from Blue corporation of $225,000 and a reduction in his stock basis from $52,500 to $27,500
Explanation:
Since the current Earning and profit = $225,000
Dividend income =$250,000
Sam basis in stock = $52,500
To calculate taxable dividend
Dividend income - Stock basis = taxable dividend
250,000 - 52,500 = 197,500
To calculate reduction in stock basis
Current E &P - taxable dividend = reduction stock basis
225,000 - 197,500 = 27,500
To calculate balance remaining in stock basis
Dividend income - Current E&P = Balance in stock basis
250,000 - 225,000 = 25,000
Since the current E& P of Blue corporation is $225,000, as a result of this Sam dividend will be taxable by the tax authority, while the remaining balance of $25,000 will further reduce Sam stock basis from $52,500 to $27,500
