Question 9 10 points Save Answer Before considering the following distribution (

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Question 9 10 points Save Answer Before considering the following distribution (date of distribution, February 6), Ludite, Inc. has a balance in AE&P; of $7,000 and a deficit in CE&P; of (S25,000). Bob is the sole shareholder of 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. Allow for rounding. A. $15,000 B. None of the answers is correct C. $50,000 D. $4,500 E. $35,000 F $45,500 G.$30,500 ?.so How much dividend income does Bob report? How much capital gain does Bob report? 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

Distributions from E&P: -

(i) If the dividend is distributed from E&P it would be taxed as ordinary income or prefrentially taxed dividend Income to the extent of E&P. In this case net E&P is $ -18,000, therefore dividend Income is 0, excess of amount received over stock basis (50,000-15,000) is Taxable Income.

(ii) If dividend is distributed in excess of E&P, it would be non taxable to the extent of share holder basis (i.e. a return of capital) ( 15,000 is return on capital to Bob, hence not taxable. After this receipt Bob's stock basis will be ($15,000-$15,000=0)

(iii) Therefore excess distribution over E&P will be a capital gain.

Based on above, answers will be as below: -

(a) Dividend Income of Bob: - Option H, $ 0 , ( refer (i) above).

(b) Capital Gain for Bob: - Option E, $ 35,000 (refer (i) above).

(c) Distribution non taxable to Bob:- Option A, $ 15,000 ( refer(ii) above).

(d) Stock basis after distribution: -Option H, $ 0 , ( refer (ii) above).

Thankyou

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