Reference no: EM133412615

The general pattern of Section 301 and section 316: Cash Distributions

ABC Corp was formed 15 years ago by A,B & C (3 individual). ABC uses the cash method of accounting and reports on a calendar year basis. A,B &C still owns shares each of the 300 shares of ABC. On 7/1 of the current year, ABC distributed $60,000, $20,000 each to A,B and C. No other distributions by ABC during the current year.

Assume A's adjusted basis in his ABC shares is 6,000, B's adjusted basis in his ABC shares is 50,000 and C's adjusted basis in his ABC shares is 0.

Unless otherwise stated, assume that the figure for "a/e&p" is the "accumulated earnings and profits" (or deficit) of ABC as of January 1 of the current year. Assume that's the figure for "ce/p" is the "current earnings and profit" (or deficit) of ABC during the current year. Treat each situation separately and characterize the distributions to A,B &C

a) A/e&p is $40,000 and c/e&p is $30,000.

b) A/e&p is $0 and c/e&p is $30,000.

c) A/e&p is $(60,000) and c/e&p is $30,000.

d) A/e&p is $(30,000) and c/e&p is $(30,000).

e) A/e&p is $(45,000 and c/e&p is $(30,000).

f) In (e) above, assume that is was possible to point to a specific event in the current year which caused the current deficit. How would this affect your answer to (e)?

g) Assume that B owned half her shares with an adjusted basis of $5000 and the other half with an adjusted basis of $45,000. How would this affect (if at all) any of your answers to (a) through (d) above?

h) In (g) above assume that B had acquired that shares with the $5000 basis on 9/1 of the current year. How would this affect your answer to (g).

(i) Assume that ABC had 3 classes of stock outstanding. A,B and C each owned 100% of one of the classes. A's stock is cumulative preferred stock entitled to a $20,000 dividend priority over any other class. B's stock while inferior to A's is entitled to a non-cumulative preference dividend of $20000 over C's common stock. ABC distributes $60,000 (20,000 each to A,B &C) as stated above . ABC's a/e&p is $40,000 and its c/e&p is 0 during the current year.

(j) Assume that ABC is an old corporation. It has current e&p of $10,000, post 1913 accumulated e&p of $30,000, per 1913 accumulated e&p of $15,000 and it has a realized gain of $20,000 attributable to an increase Iin value which occurred before 1913. It distributes $60,000 ($20,000 each to A,B &C) on 7/1 of the present year.

(k) Suppose ABC make 2 distributions during the current year: $48,000 on 3/1 and $12,000 on 9/1. ABC had a/e&p of $24,000 and c/e&p of $20,000. What portion of each cash distribution is dividend.