Husker Corporation reports current E&P of negative $200,000 in 20X3 and accumulated E&P at the beginning of the year of $300,000. Husker distributed $200,000 to its sole shareholder on December 31, 20X3. The shareholder's tax basis in her stock in Husker is$50,000. How is the distribution treated by the shareholder in 20X3?

Question

Quizplus · Accepted Answer

Husker Corporation has negative current E&P of $200,000, which means that the distribution is treated as a dividend to the extent of the current E&P. Therefore, the distribution of $200,000 is considered a dividend of $100,000 (the amount that exceeds the current E&P) and a tax-free return of basis of $50,000 to the shareholder. The remaining $50,000 is treated as a capital gain, which is calculated as follows: 
$200,000 distribution - $100,000 dividend - $50,000 tax-free return of basis = $50,000 capital gain.

Husker Corporation Reports Current E&P of Negative $200,000 in 20X3