Question
In: Accounting
A calendaryear corporation has a $75,000 current E&P amount, and a $25,000 positive accumulated E&P balance...
A calendaryear corporation has a $75,000 current E&P amount, and a $25,000 positive accumulated E&P balance at the beginning of the year. Shareholders of the corporation have a total basis in outstanding shares of $40,000. The corporation pays a $120,000 distribution to the shareholders. The tax results to the shareholders will be
A.
dividend income of $60,000 and capital gain of $60,000.
B.
dividend income of $100,000 and capital gain of $20,000.
C.
dividend income of $100,000 and a tax free return of capital of $20,000.
D.
dividend income of $100,000 and no other consequences.
Solutions
Expert Solution
Current E&P = $ 75,000
Accumulate E&P= $ 25,000
___________________________________________
Net
E&P= $
1,00,000
Distribution by Corporate $ 1,20,000
The Distribution is dividend to the
extent of current and accumulated E&P,
Therefor $ 1,00,000 shall be Dividend Income to Shareholder and
The excess distribution is tax free return of basis because shareholder tax basis in their stock exceeds the distribution therefor ($ 1,20,000 -$ 1,00,000) $ 20,000 shall be tax free return of capital of $20,000.
Therefor Option C is Correct answer -dividend income of $100,000 and a tax free return of capital of $20,000.
ekkarill92 answered 1 year agoRelated Solutions
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