Pheasant Corporation, a calendar year taxpayer, has $400,000 of current E & P and a deficit in accumulated E & P of $180,000. If Pheasant pays a $600,000 distribution to its shareholders on July 1, how much dividend income do the shareholders report?

Question

Quizplus · Accepted Answer

The shareholders report $400,000 as dividend income. This is because the distribution is first applied against the current E & P of $400,000, making that portion a dividend. The remaining $200,000 of the distribution is a return of capital or a reduction in the shareholders' basis in the stock, not dividend income, since the accumulated E & P is negative.

Pheasant Corporation, a Calendar Year Taxpayer, Has $400,000 of Current