Describe the effect of a $150,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is $35,000 when the corporation has the followingscenarios:

a. Describe the effect of a $150,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is $35,000 when the corporation has $150,000 of currentE&P and $150,000 of accumulatedE&P.

Answers:

A.

The distribution is a $150,000 dividend payable out of currentE&P.

B.

First, $35,000 is a return of capital that reduces theshareholder's stock basis to zero. The remaining $115,000 is ordinary income.

C.

First, $35,000 is a return of capital that reduces theshareholder's stock basis to zero. The remaining $115,000 is a capital gain.

D.

The dividend is a $150,000 dividend payable out of accumulatedE&P.

b. Describe the effect of a $150,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is $35,000 when the corporation has a $44,000 accumulatedE&P deficit and a $64,000 currentE&P balance.

Answers:

A.

First, $51,000 is a return of capital that reduces theshareholder's stock basis to zero.Second, $64,000 of the distribution is ordinary income from currentE&P. Third, the remaining $35,000 is a capital gain. The $44,000 accumulatedE&P deficit remains.

B.

First, $35,000 is a return of capital that reduces theshareholder's stock basis to zero.Second, $64,000 of the distribution is ordinary income from currentE&P. Third, the remaining $51,000 is a capital gain. The $44,000 accumulatedE&P deficit remains.

C.

First, $64,000 of the distribution is a dividend from currentE&P. Second, $35,000 is a return of capital that reduces theshareholder's stock basis to zero.Third, the remaining $51,000 is a capital gain. The $44,000 accumulatedE&P deficit remains.

D.

First,$35,000 is a return of capital that reduces theshareholder's stock basis to zero.Second, $115,000 of the distribution is ordinary income from currentE&P. The $44,000 accumulatedE&P deficit remains.

c. Describe the effect of a $150,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is $35,000 when the corporation has a $90,000 accumulatedE&P deficit and a $90,000 currentE&P deficit.

Answers:

A.

First, $35,000 of the distribution is a return of capital that reduces theshareholder's stock basis to zero.Second, $55,000 is a capital gain. A $90,000 accumulatedE&P deficit remains.

B.

First, $35,000 is a capital loss. The remaining $115,000 is ordinary income.

C.

First, $35,000 of the distribution is a return of capital that reduces theshareholder's stock basis to zero.Second, the remaining $115,000 is a capital gain. A $180,000 accumulatedE&P deficit remains.

D.

The distribution is a $150,000 dividend payable out of accumulatedE&P.

d. Describe the effect of a $150,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is $35,000 when the corporation has an $60,000 currentE&P deficit and a $150,000 accumulatedE&P balance.

Answers:

A.

The distribution is a $150,000 dividend payable out of accumulatedE&P. The currentE&P deficit reduces accumulatedE&P.

B.

First, $60,000 of the distribution is a dividend payable out of accumulatedE&P. The remaining $90,000 is a return of capital.

C.

The distribution is a $150,000 dividend payable out of accumulatedE&P. None of the currentE&P deficit reduces accumulatedE&P since the distribution is made on January 1.

D.

First, $60,000 of the distribution is a dividend payable out of accumulatedE&P. The remaining $90,000 reduces currentE&P.

Part II: Answer Parts a through dagain, assuming instead that the corporation makes the distribution on October 1 in a nonleap year:

a. Describe the effect of a $150,000 cash distribution paid on October 1 to the sole shareholder of a calendar year corporation whose stock basis is $35,000 when the corporation has $150,000 of currentE&P and $150,000 of accumulatedE&P.

Answers:

A.

First, $35,000 is a return of capital that reduces theshareholder's stock basis to zero. The remaining $115,000 is a capital gain.

B.

The distribution is a $150,000 dividend payable out of currentE&P.

C.

First, $35,000 is a return of capital that reduces theshareholder's stock basis to zero. The remaining $115,000 is ordinary income.

D.

The dividend is a $150,000 dividend payable out of accumulatedE&P.

b. Describe the effect of a $150,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is $35,000 when the corporation has a $44,000 accumulatedE&P deficit and a $64,000 currentE&P balance.

Answers:

A.

First, $35,000 is a return of capital that reduces theshareholder's stock basis to zero.Second, $115,000 of the distribution is ordinary income from currentE&P. The $44,000 accumulatedE&P deficit remains.

B.

First, $51,000 is a return of capital that reduces theshareholder's stock basis to zero.Second, $64,000 of the distribution is ordinary income from currentE&P. Third, the remaining $35,000 is a capital gain. The $44,000 accumulatedE&P deficit remains.

C.

First, $35,000 is a return of capital that reduces theshareholder's stock basis to zero.Second, $64,000 of the distribution is ordinary income from currentE&P. Third, the remaining $51,000 is a capital gain. The $44,000 accumulatedE&P deficit remains.

D.

First, $64,000 of the distribution is a dividend from currentE&P. Second, $35,000 is a return of capital that reduces theshareholder's stock basis to zero.Third, the remaining $51,000 is a capital gain. The $44,000 accumulatedE&P deficit remains.

c. Describe the effect of a $150,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is $35,000 when the corporation has a $90,000 accumulatedE&P deficit and a $90,000 currentE&P deficit.

Answers:

A.

The distribution is a $150,000 dividend payable out of accumulatedE&P.

B.

First, $35,000 is a capital loss. The remaining $115,000 is ordinary income.

C.

First, $35,000 of the distribution is a return of capital that reduces theshareholder's stock basis to zero.Second, $55,000 is a capital gain. A $90,000 accumulatedE&P deficit remains.

D.

First, $35,000 of the distribution is a return of capital that reduces theshareholder's stock basis to zero.Second, the remaining $115,000 is a capital gain. A $180,000 accumulatedE&P deficit remains.

d. Describe the effect of a $150,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is $35,000 when the corporation has an $60,000 currentE&P deficit and a $150,000 accumulatedE&P balance.

Answers:

A.

AccumulatedE&P as of October 1 is $105,123 so that $105,123 of the distribution is a dividend. Allocation of the currentE&P deficit to the pre-October 1 period is accomplished by multiplying $60,000 times 273/365. Of the remaining $44,877, $35,000 is a return of capital that reduces theshareholder's stock basis tozero, and the remaining $9,877 is a capital gain.

B.

The distribution is a $150,000 dividend payable out of accumulatedE&P. The currentE&P deficit reduces accumulatedE&P.

C.

The distribution is a $150,000 dividend payable out of accumulatedE&P. None of the currentE&P deficit reduces accumulatedE&P since the distribution is made on October 1.

D.

First, $60,000 of the distribution is a dividend payable out of accumulatedE&P. The remaining $90,000 reduces currentE&P.

Additional info:

$150,000 of currentE&P and $150,000 of accumulatedE&P

A $44,000 accumulatedE&P deficit and a $64,000 currentE&P balance

A $90,000 accumulatedE&P deficit and a $90,000 currentE&P deficit

An $60,000 currentE&P deficit and a $150,000 accumulatedE&P balance