Calyx Corp. is a C corporation that began operations in Year 1. Calyx Corp’s Yea

Question

Calyx Corp. is a C corporation that began operations in Year 1. Calyx Corp’s Year 1 through Year 3 taxable earnings and profits, prior to the distribution described below, are as follows:

On the last day of Year 3, Calyx Corp. makes a distribution to its sole shareholder, Melver, in the form of property with an adjusted basis to Calyx of $30,000 and a fair market value of $40,000. Assuming Melver has sufficient basis in the Calyx stock investment, what amount of the property distribution to Melver is a nontaxable return of capital?

Explanation / Answer

Answer:-

1.Average Earning & Profits = (-5000)+10000+20000= $25,000 ( Year 1+ Year 2+Year 3)

2.Distribution of appreciate property:

Earnings from distributed property :-

->FMV – Adjusted Basis

=40000-30000=$10,000

3. <-this will increase Earning & Profits. total is $35,000 (25,000+10,000)

The distribution is $40,000 to its sole shareholder

4.Which means ($35000 taxable + $5000 ROC)

so Melver Non Taxable return on Capital = $5,000 Answer

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