Wam Corp elects S Corp status on Jan 1 of the current year. At the time it has C

Question

Wam Corp elects S Corp status on Jan 1 of the current year. At the time it has C corp E&P of 200,000. Wam’s sole shareholder Jill has an adjusted basis in the shares of $150,000. For the current year Wam has separately stated income of $60,000 and tax exempt income of $40,000. It pays a dividend of $460,000.

What are tax exempt consequences of the dividend to Jill. Be very specific, if part of the dividend is not taxable say why, if part is taxable include the character.

Include your analysis what Jull’s ending outside basis is in Wam.

Explanation / Answer

the total distribution of 460000 tax treatment is as above.

Ending basis =0

To the extent of Amount Tax treatment S corp earnings            64,000 Tax free C copr E&P        2,00,000 dividends Basis in stock        1,50,000 reduces basis excess            46,000 capital gains Total        4,60,000

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