ABC Corp. has two classes of stock issued and outstanding –

• common stock, and
• nonvoting preferred stock.

Both the common and the preferred stock are traded on the New York Stock Exchange. (The exact number of shares of either class is not relevant to the present issue.)

ABC’s board of directors authorized the payment of the following cash dividends during 2021:

Common Stock

January 2 $10M

April 1 $5M

July 1 $5M

October 1 $10M

Preferred Stock

March 15 $25M

June 15 $25M

September 15 $10M

December 15 $10M

ABC had accumulated E&P of $160M as of January 1, 2021.

On or about August 31, 2021, ABC realized a one time event causing an ordinary loss of approximately $140M, This loss was also recognized on the calendar year end 2021 tax return. Before the loss current E&P totaled a positive balance of $30M. From Sept 1 to December 31, 2021 the company had current E&P of $10M (this does NOT include the one time event).

ABC is a calendar-year corporation.

As a result of recognizing this loss, ABC experienced a deficit in the current (2021) E&P of $100M.

Issue

How much or which, if any, of ABC’s 2021 dividends should have been reported to shareholders as “ordinary dividends” (Form 1099-DIV, Box 1a), and how much or which, if any, should have been reported to shareholders as “Nondividend distributions” (Form 1099-DIV, Box 3)? Explain your analysis and support your conclusions.[1]