On January 1, London Corporation (a calendar year taxpayer) has accumulated E & P of $140,000.During the year, London incurs a net loss of $200,000 from operations that accrues ratably.On June 30, London distributes $50,000 to Melissa, its sole shareholder.How much of the $50,000 represents ordinary dividend income to Melissa?

Question

Quizplus · Accepted Answer

First, we need to calculate London's E&P at the time of distribution. 
Accumulated E&P on January 1: $140,000 
Net loss for the year (accrued ratably): ($200,000)/2 = ($100,000) 
Adjusted E&P on June 30: $40,000

Next, we need to determine the impact of the distribution on Melissa's tax liability. 
Since Melissa is the sole shareholder, the distribution is assumed to be made out of London's E&P. 
Distribution on June 30: $50,000

Since the distribution of $50,000 is less than the adjusted E&P of $40,000, we can assume that the entire distribution is treated as a dividend. 
Therefore, the amount of the distribution that represents ordinary dividend income to Melissa is $50,000. Answer: C.

On January 1, London Corporation (A Calendar Year Taxpayer) Has