Jerry is the sole shareholder of Bluejay Corporation, a calendar year C corporation.As of January 1, 2020, Bluejay has a deficit of $50,000 in accumulated E & P.During 2020, it has current E & P of $300,000 and distributes a cash dividend of $400,000 to its shareholder.As of January 1, 2020, Jerry's basis in the Bluejay stock is $75,000.One result of these transactions is:

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The amount of the dividend cannot exceed the corporation's total E&P, which is $300,000. Since Bluejay has a deficit of $50,000 in accumulated E&P as of January 1, 2020, the maximum amount of dividend that can be paid without creating a second tier tax is $250,000. Since a dividend of $400,000 was paid, $150,000 will be treated as a return of capital to Jerry, reducing his basis to $75,000 - $150,000 = ($75,000). The remaining $250,000 will be treated as a taxable dividend, resulting in dividend income of $300,000 to Jerry.

Jerry Is the Sole Shareholder of Bluejay Corporation, a Calendar