The following information pertains to Dahl Corp.:
Accumulated earnings and profits at January 1, Year 1 $ 120,000
Earnings and profits for the year ended December 31, Year 1 160,000
Cash distributions to individual stockholders during Year 1 360,000
What is the total amount of distributions taxable as dividend income to Dahl's stockholders in Year 1?
a. $360,000
b. $0
c. $280,000
d. $160,000
Answer:C
Choice "c" is correct. Distributions out of the sum of current and accumulated earnings and profits are taxable as dividends to the recipients.
Accumulated E&P at 1/1/Year 1 $ 120,000
Earnings in Year 1 160,000
Taxable dividends to recipients 280,000
Excess distributed 80,000 Total distributed $ 360,000
Any excess reduces the shareholder's basis in Dahl stock, and any amount beyond that required to reduce the shareholder's basis to zero is treated as received on the sale or exchange of the stock and is capital gain.
Choices "b", "d", and "a" are incorrect, per the above calculation and explanation.