Husker Corporation reportsa deficit in current E&P of ($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?
A)$200,000 dividend
B)$100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain
C)$100,000 dividend and $100,000 tax-free return of basis
D)$0 dividend, $50,000 tax-free return of basis, and $150,000 capital gain

Question

Quizplus · Accepted Answer

Since Husker Corporation had a deficit in current E&P of ($200,000), the entire distribution of $200,000 would be treated as a dividend. Of this dividend, $50,000 would be considered a tax-free return of basis (since the shareholder's tax basis in her stock is $50,000), and the remaining $150,000 would be a capital gain to the shareholder (since her tax basis is less than the distribution amount). Therefore, the correct answer is B: $100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain.

Husker Corporation Reportsa Deficit in Current E&P of ($200,000)in 20X3