XYZ Corporation distributed to its shareholders a total of 3

XYZ Corporation distributed to its shareholders a total of $30,000 in cash plus property that had a fair market value of $80,000 and a basis of $60,000. The corporation’s earnings and profits were $100,000 on the last day of the year in which the distribution was made after taking into effect the impact on the corporation’s earning and profits of the gain recognized on the distribution (but before reducing earnings and profits by the fair market value of the distribution). How much was the total dividend income received by the shareholders as a result of the distributions made by XYZ Corporation?

A. 0.

B. $90,000.

C. $100,000.

D. $110,000.

Solution

Ans is C $100,000

Explanation: A non-liquidating distribution of cash and property is treated as dividend income subject to limit of earnings and profits available for distribution. In this case maximum E & P available is $100,000 and total value of distribution $30000+$80000 = $110,000, so $100,000 is treated as dividend income and balance $10,000 is Reduction in basis.