In: Finance
On January 1, 2019, C Corporation (a calendar year taxpayer) has E&P of $30,000. Its Current year E&P is ($3,600). On December 31, 2019, the corporation distributes $40,000 to its sole shareholder, Jimmy. Jimmy had purchased his stock in C Corporation for $7,500, 4-years ago.
Required:
a. How is the Distribution characterized by the Corporation
b. How much of the distribution must W report as Capital Gains on his tax return
Given Information:
Accumulated balance of Earnings & Profits (E&P) on 1st Jan, 2019 = $ 30,000
E&P for calender year 2019 = $ 3,600
Corporate Distribution in 2019 to sole shareholder = $ 40,000
Cost of purchase of stock by Jimmy = $ 7,500
Solution to a: Distribution by the corporation:
A distribution from a corporation is dividend to the extent of the corporation’s current-year E&P and accumulated E&P. A distribution will be treated as a dividend to the extent of a corporation’s current-year E&P, even if the corporation has an accumulated E&P deficit.
C corporation has an accumulated balance of $ 33,600 ($ 30,000 + $ 3,600) in E&P. Hence, distribution of $ 33,600 will be considered as dividend distribution.
The balance distribution of $ 6,400 ($ 40,000 - $ 33,600) will be treated as return of capital to Mr Jimmy (the shareholder).
Solution to b: Treatment of distribution in the hands of the shareholder:
As discussed above, distribution to the extent of $ 33,600 will be treated as dividend distribution. $ 6,400 being the balance will be treated as return of capital by the company.
Cost of purchase by Jimmy = $ 7,500
As the return of capital is less than cost of purchase, the difference will be treated as capital loss in the hands of the shareholder.
Amount of capital loss to be reported in his tax return = $ 6,400 - $ 7,500 = $ (900).