Question8 10 points Save Answer Before considering the following distribution (d

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Question8 10 points Save Answer Before considering the following distribution (date of distribution, February 6), Ludite, Inc. has a deficit in AE&P; of ($25,000) and a balance in CE&P; of $7,000. Bob is the sole shareholder of Ludite and has a $15, stock basis. During the current year, Ludite distributed $50,000 to Bob as a non-liquidating distribution. Answer each of the following questions relating to this distribution. How much dividend income does Bob report? How much capital gain does Bob report? A. None of the answers is correct B. $15,000 C. $7,000 D. $50,000 E. $35,000 F. $O G.$28,000 H. $43,000 How much of the distribution is non-taxable to Bob? What is Bob's stock basis when the dust clears after this distribution?

Explanation / Answer

Here, Ludite Inc. has a deficit in Accumulated E&P of $25000 whereas the balance in Current E&P is $7000.

In the given case Ludite Inc has made a non liquidation distribution of $50000 to Bob (its sole shareholder)

1. How much dividend income should Bob Report?

Since the AE&P is deficit, the distribution to the extent of CE&P shall be treated as dividend in the hands of Bob that is $7000

Ans is C

2. How much capital gain does Bob report?

Sec. 301(c) requires a shareholder to recognize the receipt of the corporate distribution as a dividend to the extent the distribution is paid from E&P as described in Sec. 316. Distributions in excess of the corporation’s E&P are taken into account by the shareholder as a return of capital, and any excess distribution will generally be recognized as capital gain.

Capital Gain = Total Distribution - CE&P - Stock basis of Bob

= $50000 - $7000 - $15000

= $28000

Ans is G

3. How much of the distribution is non taxable to Bob?

The portion of the distribution that has been received as a return of capital by Bob shall be treated as non taxable.

Therefore, in this case $15000 (stock basis) shall be non taxable for Bob.

Ans is B

4. What is Bob's stock basis after this distribution?

Bob has received $ 15000 as a return of capital through this distribution

Therefore his stock basis is $ 0 after this distribution.

Ans is F

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