Question

In: Accounting

MEMORANDUM ABC Corp. has two classes of stock issued and outstanding – •   common stock, and...

MEMORANDUM

ABC Corp. has two classes of stock issued and outstanding –

•   common stock, and
•   nonvoting preferred stock.

Both the common and the preferred stock are traded on the New York Stock Exchange. (The exact number of shares of either class is not relevant to the present issue.)

ABC’s board of directors authorized the payment of the following cash dividends during 2019:

Common Stock

January 2   $5M      
April 1       $5M
July 1       $5M
October 1   $5M

Preferred Stock

March 15   $150M
June 15   $155M
September 15   $160M
December 15   $165M

ABC had accumulated E&P of $2B as of January 1, 2019.

On or about October 10, 2019, ABC realized an ordinary loss of approximately $6B, This loss was also recognized on the 2019 tax return.

ABC is a calendar year corporation.

As a result of recognizing this loss, ABC experienced a deficit in current (2019) E&P of $4B.

Issue

How much or which, if any, of ABC’s 2019 dividends should have been reported to shareholders as “ordinary dividends” (Form 1099-DIV, Box 1a), and how much or which, if any, should have been reported to shareholders as “Nondividend distributions” (Form 1099-DIV, Box 3)? Explain your analysis and support your conclusions.

Please produce a written tax research memo with appropriate citation.

Solutions

Expert Solution

Distributions made by the corporation to its shareholders are treated as follows:

  • Treat as taxable dividend income upto the extent of higher of :
    • Current earning & Profit (CEP) or
    • Sum of Current Earnings and Profit(CEP) and accumulated Earnings and profit (AEP)
  • Remaining Dividend to the extent of shareholder's basis are treated as non taxable return of capital which reduces the shareholder's basis,
  • Dividend in excess of E&P and shareholder's basis are taxable capital gains distributions.

In the given question

CEP = Loss of $6B

Sum of CEP and AEP = Profit of $2B and loss of $6B = Loss of $4B

Since both the limits are in loss , no taxable dividend shall be distributed to the shareholders.

The entire distribution of $20M shall be Non Dividend Distribution.

form 1099-div- used to report dividends and certain other distributions to investors/taxpayers. Dividends are distributions of property by a corporation to the shareholder or owner of the corporation out of the earnings or profits of the corporation. here we have loss 4B

only for understand the concept -EXample-ABC Corporation has current E&P of $20,000 and accumulated E&P of $55,000. During the year, ABC distributed a total of $100,000 in dividends. Of this amount, $75,000 will be treated as taxable dividends, and the remaining $25,000 will be treated as a nontaxable return of capital (to the extent of a shareholder’s stock basis) or as a taxable gain to the shareholders.

but here we have given the 20M divedend distributed but we have not much profit , here we have loss in current year so entire 20M treated as nontaxable dividend.


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