Question

Describe the effect of a distribution in a year when the distributing corporation has:

a.       A deficit in accumulated E&P and a positive amount in current E&P.

b.       A positive amount in accumulated E&P and a deficit in current E&P.

c.       A deficit in both current and accumulated E&P.

d.       A positive amount in both in both current and accumulated E&P.

Answer 1

1-	A deficit in accumulated E&P and a positive amount in current E&P.	When current Earning & Profit is positive and accumulated Earning & Profit has a negative balance then accumulated Earning & Profit is not settled against current Earning & Profit. Instead, the distribution is deemed to be taxable dividend upto the extent of positive current Earning & Profit balance
2-	A positive amount in accumulated E&P and a deficit in current E&P	When a shortage exists in current Earning & Profit and a surplus exists in accumulated Earning & Profit, the accounts are settled at the time of distribution and If the resulting balance is negative, the distribution is considered as a return of capital. & a positive balance results in, the distribution of dividend to the extent of balance
3-	A deficit in both current and accumulated E&P.	If there is a shortage in both current and accumulated Earning & Profit, a distribution is considered as a return of capital to the extent of the shareholder’s basis in his stock. Any excess amount is considered as a capital gain
4-	A positive amount in both in both current and accumulated E&P	When a positive balance exists in both the current and the accumulated Earning & Profit accounts, distributions are considered to be made first from current E&P and then from accumulated E&P