On January 1, Crow Corporation (a calander year taxpayer) has
accumulated Earnings and Profits (E & R) of $250,000.  Its current E &
P for the year is $110,000 (before considering the impact of dividend
distributions).  During the year, Crow distributes $650,000 ($325,000
each) to its equal shareholders Shawn and Andy.  Shawn has a basis in
his stock of $75,000, while Andy's basis is $200,000.  What is the
effect of the distribution by Crow Corporation on Shawn and Andy?

Hi again,

Shawn and Andy each have dividend income of $180,000  {[$250,000
(Starling Corporation's accumulated E & P) + $110,000 (Starling
Corporation's current E & P)] 2}. The remaining $290,000 distributed
reduces the basis in the Starling Corporation stock, with the excess
treated as capital gain. Thus, Shawn reduces her basis in the stock to
zero and has a capital gain of $70,000. Andy reduces his stock basis
to $55,000.

I found the same question & answer online, but with different names
and figures, so I re-calculated it:
http://bloodstone.atkinson.yorku.ca/domino/Html/users/pevans/pewwwdl.nsf/0a9ef58d314fedcf85256a03006f17db/7855c1b72b1cc70085256aae000b4c13?OpenDocument


Search strategy: "What is the effect of the distribution by"


Best wishes,
robertskelton-ga

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Clarification of Answer by robertskelton-ga on 07 Apr 2003 19:38 PDT

Oops! -  it should have read Crow Corporation like this:

Shawn and Andy each have dividend income of $180,000  {[$250,000 (Crow
Corporation's accumulated E & P) + $110,000 (Crow Corporation's
current E & P)] 2}. The remaining $290,000 distributed reduces the
basis in the Crow Corporation stock, with the excess treated as
capital gain. Thus, Shawn reduces her basis in the stock to zero and
has a capital gain of $70,000. Andy reduces his stock basis to
$55,000.