Adrian owns 100% of the stock in Balboa Corporation (“Balboa”), a calendar year corporation. Adrian has an adjusted basis of $25,000 in her stock as of the beginning of the current year (2016). Balboa has a CE&P deficit of ($10,000) (i.e., negative $10,000) for the current year (2016) and a positive AE&P of $90,000 as of the beginning of the year. Balboa makes a nonliquidating distribution to Adrian of $40,000 on December 31, 2016.

1.            How much of the distribution to Adrian is treated as a dividend?

a.            $0

b.            $25,000

c.             $40,000

d.            $15,000

e.            $30,000

2.            What is Balboa’s AE&P at the end of the year (after taking into account the effect of the distribution)?

a.            $80,000

b.            $55,000

c.             $40,000

d.            $65,000

e.            $50,000

Please provide a brief explanation

Answer rating: 100% (QA)

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