A calendar-year 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

Question

Quizplus · Accepted Answer

The distribution is a dividend to the extent of E&P, which is $75,000. The excess of the distribution over E&P ($120,000 - $75,000 = $45,000) is a tax-free return of capital to the extent of the shareholders' basis in their stock ($40,000). The remaining $5,000 is a capital gain.

A Calendar-Year Corporation Has a $75,000 Current E&P Amount,and a $25,000