[UghCPAz]

Hey everyone –

This has been posted before, but I couldn’t find a good answer. I’m taking reg tomorrow and am very confused!!

Question regarding S-Corp distributions with C-Corp Accumulated E&P.

From Becker Simulation:

Rogers, Inc. is an S Corporation and has previous C Corporation Earnings and Profits in the amount of $21,000. At the end of Year 5, Rogers, Inc. had an Accumulated Adjustments Account balance of $33,000. At the end of the year, Rogers made a distribution to Mary, its only shareholder. The distribution consisted of land with a FMV and adjusted basis of $78,000. Assume Mary’s basis in the corporate stock was $15,000 after any Year 5 income items but before the distribution.

Answers: As a result of the distribution, how much of the distribution is tax free to Mary? $33,000.

As a result of the distribution, how much is a taxable dividend to Mary? $21,000.

What additional amount of the remaining distribution is taxable gain to Mary? $9,000.

I know that first the distribution is taken from AAA, but I thought that it also reduces the basis in Mary’s stock? So the AAA account would go down to zero, and her basis would also go down to zero (15,000 – 33,000). Then 21,000 would come out of Corporate E&P and be a taxable dividend. Then there would be no return of capital (because her basis was brought down to zero). The rest (24,000?) would be a LT capital gain.

I know that the distribution is first a tax-free distribution from AAA, but I thought that also reduces the basis. The answer from Becker states, “After accounting for the 33,000 tax free amount and taxable dividend of 21,000, the remaining distribution is 24,000. This amount is a tax free reduction of corporate stock basis until that reaches zero. Since the basis is $15,000, that amount is $15,000. This leaves the remaining 9,000 in excess of basis taxed as a Capital Gain.”

Is Becker correct in their answer? Or are they wrong? Thanks for the help!

AUD - 99
BEC - 90
FAR - 96
REG - 90

Katie Thomas, CPA
https://www.youtube.com/katiethomascpa

Just AUD left

[monikernc]

Now i am confused.

AUD - 93
BEC - 82
FAR - 76
REG - 88

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[mtaylo24]

I think since you ran out of basis, you treat the extra 9000 as gain. You may need to disregard the AAA reduction in basis in the first step for it to make sense (I think that will only apply if you will have basis after the distribution).

1.) 78,000 – 33,000 AAA (Tax-Free) = 45,000 Left to Distribute
2.) 45,000 – 21,000 AEP (Taxable Dividend) = 24,000 Left to Distribute
3.) 24,000 – 15,000 Old Basis (Return of Capital) = 9,000 (LTCG)

or

1.) 78,000 – 33,000 AAA (Tax Free) – 21,000 AEP (Taxable Dividend) – 15,000 Old Basis (Return of Capital) = 9,000 LTCG

CPA (2017)

REG:  75

BEC:  76

FAR:  77

AUD: 78

 

CMA (2019)

P1: 380

P2: 360

AUD - 1st - 60 (12/12), 61 (2/13), 61 (8/13), 78! (11/15)
REG - 55 (2/16) 69 (5/16) Retake(8/16)
BEC - 71(5/16) Retake (9/16)
FAR - (8/16)

[UghCPAz]

@mtaylo24 Ahh thank you!! I understand now 🙂

AUD - 99
BEC - 90
FAR - 96
REG - 90

Katie Thomas, CPA
https://www.youtube.com/katiethomascpa

Just AUD left

[mtaylo24]

This one is super shaky, but hopefully you won't come across many of these. Best of luck tomorrow!

CPA (2017)

REG:  75

BEC:  76

FAR:  77

AUD: 78

 

CMA (2019)

P1: 380

P2: 360

AUD - 1st - 60 (12/12), 61 (2/13), 61 (8/13), 78! (11/15)
REG - 55 (2/16) 69 (5/16) Retake(8/16)
BEC - 71(5/16) Retake (9/16)
FAR - (8/16)

[Author]

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