Yellow Corporation has a deficit in accumulated E & P of $600,000 and has current E & P of $450,000.On July 1,Yellow distributes $500,000 to its sole shareholder,Eugene,who has a basis in his stock of $105,000.As a result of the distribution,Eugene has:
A)Dividend income of $450,000 and no adjustment to stock basis.
B)Dividend income of $105,000 and reduces his stock basis to zero.
C)Dividend income of $450,000 and reduces his stock basis to $55,000.
D)No dividend income,reduces his stock basis to zero,and has a capital gain of $500,000.
E)None of the above.

Question

Quizplus · Accepted Answer

Yellow Corporation has a deficit in accumulated E&P of $600,000, meaning that the entire distribution of $500,000 would be treated as a dividend. Eugene would have dividend income of $450,000 ($500,000 distribution - $50,000 E&P balance). The $105,000 basis in his stock would be reduced to $55,000 ($105,000 - $50,000 distribution + $500,000 dividend income). Therefore, the correct answer is C.

Yellow Corporation Has a Deficit in Accumulated E & P