Lone Star Company is a calendar-year corporation, and this year Lone Star reported $130,000 in current E&P that accrued evenly throughout the year. At the beginning of the year, Lone Star's accumulated E&P was $15,600. At the beginning of the year, Lone Star's sole shareholder was Matt. Lone Star declared $39,000 in cash distributions on each of the following dates: March 31, June 30, September 30, and December 31.

B. Suppose that Matt sold half of the shares to Chris on June 1st for $43,000. How much dividend income will Matt recognize this year?

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Matt received a total $97,500($39,000+$19,500+$19,500+$19,500) and $92,300 will be treated as dividends ($39,000+$19,500+$17,550+ $16,250 ) and the remaining $5,200 is a return of capital. Matt received the entire March 31st distribution which is treated as a dividend. Matt also received half of the remaining distributions ( $117,0001/2=$58,500 ). The June 30 distribution of $19,500 is also treated as a dividend, whereas 90% of the September 30 distribution is a dividend (90%$19,500=$17,550) and the remaining $1,950 is a return of capital. The final distribution of $19,500 resulted in a $16,250 dividend and a $3,250 return of capital