Larry, the sole shareholder of Brown Corporation, sold his Brown stock to Ed on July 30 for $270,000. Larry’s basis in the stock was $200,000 at the beginning of the year. Brown had accumulated E & P of $120,000 on January 1 and has current E & P of $240,000. During the year, Brown made the following distributions: $450,000 of cash to Larry on July 1 and $150,000 of cash to Ed on December 30. How will Larry and Ed be taxed.
Larry, the sole shareholder of Brown Corporation, sold his Brown stock to Ed on July 30 for $270,000. Larry’s basis in the stock was $200,000 at the beginning of the year. Brown had accumulated E & P of $120,000 on January 1 and has current E & P of $240,000. During the year, Brown made the following distributions: $450,000 of cash to Larry on July 1 and $150,000 of cash to Ed on December 30. How will Larry and Ed be taxed.
Brown Corporation carries $240,000 in their current E&P of and the amount is assigned on the basis of pro-rata basis for the two allocations done in that year. Thus, $180,000 of their current E&P is assigned to Larry’s distribution [$240,000 current E&P × ($450,000 distribution to Larry/$600,000 total distributions)] and $60,000 is assigned to Ed’s assigned [$240,000 current E&P × ($150,000 distribution to Ed/$600,000 total distributions)]. Collected E & P is applied in consecutive order beginning with the earliest distribution.
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