Jerry is the sole shareholder of Bluejay Corporation,a calendar year C corporation.As of January 1,2014,Bluejay has a deficit of $50,000 in accumulated E & P.During 2014,it has current E & P of $300,000 and distributes a cash dividend of $400,000 to its shareholder.As of January 1,2014,Jerry's basis in the Bluejay stock is $75,000.One result of these transactions is:

Question

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Jerry has dividend income of $300,000 (the amount of Bluejay's current E & P).The remaining $100,000 of the $400,000 distribution is a return of capital.As his basis in the stock is only $75,000,the extra $25,000 is a capital gain.Consequently,Jerry's basis in the Bluejay stock as of January 1,2015,is $0.Since a dividend cannot increase a deficit,Bluejay's accumulated E & P on January 1,2015,is still a deficit of $50,000.

Jerry Is the Sole Shareholder of Bluejay Corporation,a Calendar Year