Ponoco Corporation, which has current earnings and profits (CE&P) of $10,000 and accumulated earnings and profits (AE&P) of $30,000, makes a $41,000 distribution to its sole shareholder, Greg, at the end of the current year.Greg has a basis in his Ponoco stock of $2,000.What is the amount of taxable income Greg must report from the Ponoco distribution?

Question

Quizplus · Accepted Answer

The distribution is first considered to come from the current earnings and profits (CE&P) of $10,000, which is taxable as a dividend. The remaining $31,000 is then considered to come from the accumulated earnings and profits (AE&P) of $30,000, which is also taxable as a dividend. This totals $40,000 of the distribution being taxable as a dividend. The last $1,000 of the distribution is a return of capital and reduces Greg's basis in the stock to $1,000 ($2,000 - $1,000). Since the distribution does not exceed the sum of CE&P and AE&P, there is no capital gain. Therefore, Greg must report $40,000 of taxable income from the distribution.

Ponoco Corporation, Which Has Current Earnings and Profits (CE&P) of $10,000