Longhorn Company reports current E&P of $100,000 in 20X3 anda deficit of ($200,000)in accumulated E&P at the beginning of the year. Longhorn distributed $300,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $100,000. How is the distribution treated by the shareholder in 20X3?
A)$300,000 dividend
B)$100,000 dividend, $100,000 tax-free return of basis, and $100,000 capital gain
C)$100,000 dividend and $200,000 tax-free return of basis
D)$0 dividend, $100,000 tax-free return of basis, and $200,000 capital gain

Question

Quizplus · Accepted Answer

The distribution is first treated as a dividend to the extent of the company's current E&P of $100,000, making $100,000 of the distribution a dividend. The remaining $200,000 is first treated as a tax-free return of basis, bringing the shareholder's basis in the stock to $0. The remaining $100,000 is then treated as a capital gain. Therefore, the distribution is a $100,000 dividend, a $100,000 tax-free return of basis, and a $100,000 capital gain.

Longhorn Company Reports Current E&P of $100,000 in 20X3 Anda