Melissa owns 100% of the stock in Fitness Corporation (Fitness), a calendar year corporation. Melissa has an
Question:
Melissa owns 100% of the stock in Fitness Corporation (“Fitness”), a calendar year corporation. Melissa has an adjusted basis of $25,000 in her stock at the beginning of the current year (2016). Fitness has $60,000 of CE&P for the current year and zero AE&P as of the beginning of the year. With respect to the CE&P of $60,000, $30,000 was earned during the first six months of the year and $30,000 was earned during the last six months of the year. Fitness makes a nonliquidating distribution to Melissa of $40,000 on July 1, 2016.
1. How much of the distribution to Melissa is treated as a dividend?
a. $30,000
b. $25,000
c. $40,000
d. $0
e. $20,000
2. What is Fitness’ AE&P as of the end of 2016?
a. $30,000
b. $35,000
c. $20,000
d. $60,000
e. $40,000
Please provide brief explanation for the answer
