As of January 1, Cassowary Corporation has a deficit in accumulated E & P of $100,000. For the tax year, current E & P (accrued ratably) is $240,000 (prior to any distributions). On July 1, Cassowary Corporation distributes
$275,000 to its sole shareholder. The amount of the distribution that is a dividend is:
A) $20,000.
B) $140,000.
C) $240,000.
D) $275,000.
E) None of these.

Question

Quizplus · Accepted Answer

The amount of the distribution that is considered a dividend equals the current E & P of $240,000. The distribution first absorbs the current E & P before it is applied against the deficit in accumulated E & P or considered a return of capital or capital gain.

As of January 1, Cassowary Corporation Has a Deficit in Accumulated