Tangelo Corporation has an August 31 year-end.Tangelo had $50,000 in accumulated E & P at the beginning of its 2016 fiscal year (September 1,2015) and during the year,it incurred a $75,000 operating loss.It also distributed $65,000 to its sole shareholder,Cass,on November 30,2015.If Cass is a calendar year taxpayer,how should she treat the distribution when she files her 2015 income tax return (assuming the return is filed by April 15,2016)?

Question

Quizplus · Accepted Answer

The distribution of $65,000 is greater than the accumulated E&P at the beginning of the year ($50,000), which means it is a dividend and not a return of capital. As Cass is a calendar year taxpayer, the distribution is considered to be received in the 2015 calendar year, and thus should be reported as dividend income on her 2015 tax return.

Tangelo Corporation Has an August 31 Year-End