A calendar-year corporation has negative current E&P of $500 and accumulated positive E&P of $1,000. The corporation makes a $600 distribution to its sole shareholder. Which of the following statements is true?

Question

Quizplus · Accepted Answer

The distribution will first be applied against accumulated E&P, leaving a balance of $400. Depending on the balance in current E&P on the date of the distribution, up to $400 of the remaining distribution could be treated as a dividend. Since current E&P is negative, only up to $200 could be treated as a dividend ($400 balance in distribution minus $200 deficit in current E&P). Therefore, the remaining $400 would be treated as a return of capital.

A Calendar-Year Corporation Has Negative Current E&P of $500 and Accumulated