Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000. On July 1, Blue distributes $250,000 to its sole shareholder, Sam, who has a basis in his stock of $52,500. As a result of the distribution, Sam has:

Sam's dividend income is $225,000 and has a reduction of stock basis of $27,500

Explanation:

From the example,

Given that,

Sam stock is = $52.500

Blue corporation has deficit in accumulated E and P which is = $300,000

Blue corporation has current E and P of = $225,000

Blue distributes $250,000 to its shareholder on July 1st

Therefore,

Blue corporation has a current E & P of $225,000, to an extent, Sam has a taxable dividend. The remaining $25,000 reduces his basis stock.

Sam has an income dividend of $225,000 and reduces his stock basis to $27,500.

Answer: Sam will have a dividend income from Blue corporation of $225,000 and a reduction in his stock basis from $52,500 to $27,500

Explanation:

Since the current Earning and profit = $225,000

Dividend income = $250,000

Sam basis in stock = $52,500

To calculate taxable dividend

Dividend income - Stock basis = taxable dividend

250,000 - 52,500 = 197,500

To calculate reduction in stock basis

Current E &P - taxable dividend = reduction stock basis

225,000 - 197,500 = 27,500

To calculate balance remaining in stock basis

Dividend income - Current E&P = Balance in stock basis

250,000 - 225,000 = 25,000

Since the current E& P of Blue corporation is $225,000, as a result of this Sam dividend will be taxable by the tax authority, while the remaining balance of $25,000 will further reduce Sam stock basis from $52,500 to $27,500