64. Elvis owns all of the stock of White Corporation. The accumulated earnings and profits of White Corporation at the beginning of the year are a deficit of $20,000. The current earnings and profits are $30,000. Elvis’ basis for his stock is $250,000. He receives a distribution of $300,000 on the last day of the tax year. How much dividend income and/or capital gain should Elvis report?

Question

64.	Elvis owns all of the stock of White Corporation. The accumulated earnings and profits of White Corporation at the beginning of the year are a deficit of $20,000. The current earnings and profits are $30,000. Elvis’ basis for his stock is $250,000. He receives a distribution of $300,000 on the last day of the tax year. How much dividend income and/or capital gain should Elvis report?

Quizplus · Accepted Answer

Due to current E & P,Elvis has dividend income of $30,000.The negative balance of $20,000 in accumulated E & P has no effect.The balance of the distribution of $270,000 ($300,000 - $30,000)is treated as a return of capital.The return of capital distribution reduces Elvis' stock basis to $0 ($250,000 - $250,000).Therefore,$20,000 of the distribution is taxable as a capital gain.

64 Elvis Owns All of the Stock of White Corporation