At the beginning of the current year, Charles owns all of ABC Corporation’s outstanding stock. His basis in the stock is $100,000. On July 1, he sells all his stock to Donald for $200,000. On September 1, Donald sold 30% of his stock to Andy for $100,000 and 70% of his stock to Jim for $200,000. During the year, ABC, a calendar year taxpayer, made the following cash distributions: $100,000 on March 1 to Charles, $200,000 on July 1 to Donald and $200,000 on September 1 to Andy and Jim. Assume Current E&P of $50,000; accumulated E&P of $350,000. How much is Andy’s dividend income?


Step 1 of 2

According to problem, Charles owns all of ABC Corporation’s outstanding stock at the beginning of the current year and his basis in the stock is $100,000. On July 1, he sells all his stock to Donald for $200,000 and Donald sold 30% of his stock to Andy for $100,000 and 70% of his stock to Jim for $200,000on September 1 . ABC, a calendar year taxpayer, made the following cash distributions during the year :

$100,000 on March 1 to Charles

$200,000 on July 1 to Donald

$200,000 on September 1 to Andy and Jim.

Andy’s dividend income is to be calculated.

Dividend income – The payments a shareholder receives from a company in which they own stock are referred to as dividend income. Usually, the company’s profits are distributed to its shareholders in the form of these payments. Dividend income may come in the form of money, more stock, or other assets.

Explanation:

At the start of the current year, Charles has$100,000 as his basis in all of the outstanding stock of ABC Corporation . on the basis of given situation, Andy’s dividend income is to be calculated and to calculate Andy’s dividend income, it is needed to determine the dividend received by Andy from ABC corporation.

Step 2 of 2

To calculate Andy’s dividend income, it is needed to determine the dividend received by Andy from ABC corporation.

Firstly determine the pertinent transaction :

1) March 1: Charles receives a $100,000 cash distribution.

2) July 1: Donald purchases the stock from Charles for $200,000.

3) July 1: ABC Corporation makes a$200,000 cash distribution to Donald.

4) September 1: Donald sells30%of his stock to Andy for$100,000.

5) September 1: Donald sells 70% of his stock to Jim for $200,000.

6) September 1: ABC Corporation makes $200,000 cash distribution to Andy and Jim.

Andy acquired 30% of the stock on September 1, it is needed to find out how much of the cash distribution he received:

Andy’s dividend income=ABC Corporation’s cash distribution to Andy

On September 1, ABC Corporation distributed$200,000 to Andy and Jim. Since Andy owns 30% of the stock:

Andy’s dividend income = 30% of $200,000

Andy’s dividend income =0.30×$200,000

Andy’s dividend income = $60,000

Explanation:

Andy acquired 30% of the stock on September 1 and ABC corporation distributed $200,000 to Andy and Jim. Since Andy own 30% of the stock that is why Andy’s dividend income is $60,000 .

Final solution

Andy’s Dividend income is $60,000.

 

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