Question

Complete the following schedule. For each case, assume that there is one shareholder whose basis in the corporate stock is $25,000. Also assume that current losses accrue ratably throughout the year, and that the corporation uses a calendar year for tax purposes.

	Accumulated E&P Beginning of year	Current E&P	Cash Distribution	Date of Distribution	Ordinary Dividend Income
a.	($40,000)	$70,000	$40,000	8/31	40000
b.	(60,000)	25,000	30,000	3/31	25000
c.	50,000	(60,000)	35,000	12/31	0
d.	100,000	(80,000)	70,000	6/30	60000
e.	30,000	60,000	75,000	11/30	75000

I'm curious on how to find the ordinary dividend. I have filled in the answers but I don't know how my teacher got there. Please help.

Answer 1

1. If current E&P is positive and there is a deficit in accumulated E&P, then accumulated E&P should not be adjusted against current E&P. Cash distribution to the extent of positive current E&P balance is treated as ordinary dividend income. i.e. in your case (a) & (b).
2. If accumulated E&P is positive and current E&P is negative, then net off both.

• After netting off, if the balance is negative or zero then it is not ordinary dividend rather a distribution of capital. case (c)
• If balance is positive then treat as ordinary dividend income to the extent of balance. Remember to consider current E&P proportionately for set off as shown under:

In case (d), current E&P is -80000 for the year, however as the distribution date is 6/30 i.e midyear, therefore, current E&P eligible for set off would be (-80000*6/12); -40000. When we set off this -40,000 with 100,000, we get 60,000 balance as against cash distribution of 70,000 hence ordinary dividends restricted to 60,000.

3. If both current E&P and accumulated E&P is positive, then entire distribution is treated as ordinary dividend income. case (e)