Husker Corporation reports current E&P of negative $200,000 in year 1 and accumulated E&P at the beginning of the year of $300,000.Husker distributed $200,000 to its sole shareholder on December 31, year 1.The shareholder's tax basis in her stock in Husker is $50,000.How is the distribution treated by the shareholder in year 1?
A)$200,000 dividend.
B)$100,000 dividend, $50,000 nontaxable return of basis, and $50,000 capital gain.
C)$100,000 dividend and $100,000 nontaxable return of basis.
D)$0 dividend, $50,000 nontaxable return of basis, and $150,000 capital gain.

Question

Quizplus · Accepted Answer

The distribution of $200,000 exceeds the current E&P of negative $200,000, resulting in a dividend for tax purposes. However, the shareholder can also recover her tax basis of $50,000, which is nontaxable, and the remaining $100,000 is treated as a capital gain. Therefore, the distribution is a $100,000 dividend, a $50,000 nontaxable return of basis, and a $50,000 capital gain.

Husker Corporation Reports Current E&P of Negative $200,000 in Year