On January 1, 2019, Providence Corporation had a “Deficit” (negative) in its Accumulated Earnings And Profits...

On January 1, 2019, Providence Corporation had a “Deficit” (negative) in its Accumulated Earnings And Profits (E&P) of ($120,000). For the year of 2019, Providence Corporation had positive Current Earnings and Profits (E&P) of $80,000. On December 31,2019, Providence Corporation distributed $85,000 to its sole shareholder, Freddie. At the time of the distribution, Freddie had a basis of $30,000 in her stock in Providence Corporation. Freddie’s Taxable Dividend Income as a result of this distribution is:

$0
$80,000
$85,000
$30,000

Solutions

Expert Solution

Providence corporation has current E & P of $80,000 even though its accumulated E & P is a deficit i.e $120000.

To the extent of the current E & P, Freddie has a taxable dividend i.e $80000.

The remaning $5000 will reduce Freddie's stock basis to $25000.

ekkarill92 answered 2 years ago

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