John owns 100% of the stock of Zook, Inc

Accounting Dec 18, 2020

John owns 100% of the stock of Zook, Inc., with an adjusted basis of $70,000. He receives a cash distribution of $195,000 from Zook when its earnings and profits are $85,000.

a) What is John's dividend income?

b) What is John's recognized gain or loss?

c) What is John's adjusted basis for her stock after the distribution?

Expert Solution

Distribution to the extent of E&P balance is dividend income.

Dividend income is $85,000

Recognized gain = Cash distribution- Profits- Adjusted basis

= 195000 - 85000 - 70000

= 40000

Adjusted basis is $0

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