Federal Income Tax II ACCT-3020

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LO.I, 3, 8 Your client, Heron Corporation, contacted you and would like your advice on future shareholder distributions. Martin Morales (Heron's president) informs you that Heron has a deficit in accumulated E & P Of $300,000. Starting this year, it expects to generate annual E & P Of $150,000 for the next four years and would like to distribute this amount to its shareholders. How should Heron Corporation distribute the $600,000 over the four-year period to provide the least amount Of dividend income to its shareholders (all individuals)? In a letter to Heron's president, make appropriate suggestions on how this should be done. Also prepare a memo for your firm's file. Heron Corporation's address is 12 Nature Trail Way, Daytona Beach, FL 32114.

shareholders over the next four years. Our conclusion is based on the facts as outlined in your September 1 st letter and any change in these facts may cause this conclusion to be inaccurate. Heron Corporation has a deficit in accumulated E \& P of $300,000 as of January 1, 2021. Starting this year, Heron Corporation expects to generate annual E \& P of $150,000 for the next four years and would like to distribute this amount to its shareholders. The corporation's objective is to make the distribution in a manner that results in the least amount of dividend income to its shareholders. Therefore, Heron Corporation should make a distribution of \$ during 2021 and distribute \$ on December 31, 2022. During 2023, Heron Corporation should make a distribution of \$ and distribute the remaining on December 31, 2024. This will result in distribution being taxed to the shareholders as dividend income. At the end of 2021 there is a E \& P of $ When the distribution is made in 2022 , is taxed as dividend income. This the case in 2023 and 2024. On the other hand, If $150,000 is distributed each year, the shareholders are taxed on distribution because it is covered by current E. \& P. The deficit in accumulated E\& \& P part of the distribution to be nontaxable. Should you need additional information or need clarification on our conclusion, do not hesitate to call on me. Sincerely yours, SUBJECT: Heron Corporation Today I spoke with the president of Heron Corporation regarding the September 1, 2021 letter. Heron Corporation has a deficit in its accumulated E \& P of $300,000 as of January 1, 2021. Starting in 2021, Heron Corporation expects to generate annual E \& P of $150,000 for the next four years and wants to distribute this amount to its shareholders. Heron corporation wants to know how it should distribute the $600,000 over a four-year period in order to result in the least amount of dividend income to its shareholders. Issue: When a corporation has a deficit in accumulated E\& P, is it possible to structure a corporate distribution so that a part of the distribution will not constitute dividend income, even though current E \& P is avallable? Conclusion: If Heron Corporation does not make a distribution in 2021 or in 2023, $600,000 total distribution, constitutes dividend income. This is the case because in 2021, the \$ current E \& P is netted with the In E \& P to the in accumulated E \& P to $ as of December 31, 2021. If in 2022, Heron Corporation makes a $300,000 distribution to its shareholders, \$ of the distribution is dividend income and $ is a return of capital to the shareholders, If in 2023, Heron Corporation makes no distribution, at the end of 2023 , accumulated E \& P is \$ If in 2024, Heron Corporation makes a distribution of $300,000,$ represents dividend income and \$ is a return of capital