# Describe the effect of a \$100,000 cash distribution paid on January 1 to the sole shareholder of a

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Describe the effect of a \$100,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is \$25,000 when the corporation has

a.
\$100,000 of current E&P and \$100,000 of accumulated E&P
b.
A \$50,000 accumulated E&P deficit and a \$60,000 current E&P balance
c.
A \$60,000 accumulated E&P deficit and a \$60,000 current E&P deficit
d.
An \$80,000 current E&P deficit and a \$100,000 accumulated E&P balance
Answer Parts a through d again, assuming instead that the corporation makes the distribution on October 1 in a nonleap year.

a. Describe the effect of a \$100,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is \$25,000 when the corporation has \$100,000 of current E&P and \$100,000 of accumulated E&P.

A.

The distribution is a \$100,000 dividend payable out of current E&P.

B.

First, \$25,000 is a return of capital that reduces the shareholder's stock basis to zero. The remaining \$75,000 is a capital gain.

C.

The dividend is a \$100,000 dividend payable out of accumulated E&P.

D.

First, \$25,000 is a return of capital that reduces the shareholder's stock basis to zero. The remaining \$75,000 is ordinary income.

b. Describe the effect of a \$100,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is \$25,000 when the corporation has a \$50,000 accumulated E&P deficit and a \$60,000 current E&P balance.

A.

First, \$15,000 is a return of capital that reduces the shareholder's stock basis to zero. Second, \$60,000 of the distribution is ordinary income from current E&P. Third, the remaining \$25,000 is a capital gain. The \$50,000 accumulated E&P deficit remains.

B.

First, \$25,000 is a return of capital that reduces the shareholder's stock basis to zero. Second, \$85,000 of the distribution is ordinary income from current E&P. The \$50,000 accumulated E&P deficit remains.

C.

First, \$25,000 is a return of capital that reduces the shareholder's stock basis to zero. Second, \$60,000 of the distribution is ordinary income from current E&P. Third, the remaining \$15,000 is a capital gain. The \$50,000 accumulated E&P deficit remains.

D.

First, \$60,000 of the distribution is a dividend from current E&P. Second, \$25,000 is a return of capital that reduces the shareholder's stock basis to zero. Third, the remaining \$15,000 is a capital gain. The \$50,000 accumulated E&P deficit remains.

c. Describe the effect of a \$100,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is \$25,000 when the corporation has a \$60,000 accumulated E&P deficit and a \$60,000 current E&P deficit.

A.

First, \$25,000 is a capital loss. The remaining \$75,000 is ordinary income.

B.

First, \$25,000 of the distribution is a return of capital that reduces the shareholder's stock basis to zero. Second, the remaining \$75,000 is a capital gain. a \$120,000 accumulated E&P deficit remains.

C.

First, \$25,000 of the distribution is a return of capital that reduces the shareholder's stock basis to zero. Second, \$35,000 is a capital gain. A \$60,000 accumulated E&P deficit remains.

D.

The distribution is a \$100,000 dividend payable out of accumulated E&P.

d. Describe the effect of a \$100,000 cash distribution paid on January 1 to the sole shareholder of a calendar year corporation whose stock basis is \$25,000 when the corporation has an \$80,000 current E&P deficit and a \$100,000 accumulated E&P balance.

A.

The distribution is a \$100,000 dividend payable out of accumulated E&P. None of the current E&P deficit reduces accumulated E&P since the distribution is made on January 1.

B.

First, \$80,000 of the distribution is a dividend payable out of accumulated E&P. The remaining \$20,000 is a return of capital.

C.

First, \$80,000 of the distribution is a dividend payable out of accumulated E&P. The remaining \$20,000 reduces current E&P.

D.

The distribution is a \$100,000 dividend payable out of accumulated E&P. The current E&P deficit reduces accumulated E&P.

Answer Parts a through d again, assuming instead that the corporation makes the distribution on October 1 in a nonleap year.

a. Describe the effect of a \$100,000 cash distribution paid on October 1 to the sole shareholder of a calendar year corporation whose stock basis is \$25,000 when the corporation has \$100,000 of current E&P and \$100,000 of accumulated E&P.

A.

First, \$25,000 is a return of capital that reduces the shareholder's stock basis to zero. The remaining \$75,000 is a capital gain.

B.

The distribution is a \$100,000 dividend payable out of current E&P.

C.

The dividend is a \$100,000 dividend payable out of accumulated E&P.

D.

First, \$25,000 is a return of capital that reduces the shareholder's stock basis to zero. The remaining \$75,000 is ordinary income.

b. Describe the effect of a \$100,000 cash distribution paid on October 1 to the sole shareholder of a calendar year corporation whose stock basis is \$25,000 when the corporation has a \$50,000 accumulated E&P deficit and a \$60,000 current E&P balance.

A.

First, \$15,000 is a return of capital that reduces the shareholder's stock basis to zero. Second, \$60,000 of the distribution is ordinary income from current E&P. Third, the remaining \$25,000 is a capital gain. The \$50,000 accumulated E&P deficit remains.

B.

First, \$25,000 is a return of capital that reduces the shareholder's stock basis to zero. Second, \$60,000 of the distribution is ordinary income from current E&P. Third, the remaining \$15,000 is a capital gain. The \$50,000 accumulated E&P deficit remains.

C.

First, \$60,000 of the distribution is a dividend from current E&P. Second, \$25,000 is a return of capital that reduces the shareholder's stock basis to zero. Third, the remaining \$15,000 is a capital gain. The \$50,000 accumulated E&P deficit remains.

D.

First, \$25,000 is a return of capital that reduces the shareholder's stock basis to zero. Second, \$85,000 of the distribution is ordinary income from current E&P. The \$50,000 accumulated E&P deficit remains.

c. Describe the effect of a \$100,000 cash distribution paid on October 1 to the sole shareholder of a calendar year corporation whose stock basis is \$25,000 when the corporation has a \$60,000 accumulated E&P deficit and a \$60,000 current E&P deficit.

A.

First, \$25,000 is a capital loss. The remaining \$75,000 is ordinary income.

B.

First, \$25,000 of the distribution is a return of capital that reduces the shareholder's stock basis to zero. Second, \$35,000 is a capital gain. A \$60,000 accumulated E&P deficit remains.

C.

The distribution is a \$100,000 dividend payable out of accumulated E&P.

D.

First, \$25,000 of the distribution is a return of capital that reduces the shareholder's stock basis to zero. Second, the remaining \$75,000 is a capital gain. a \$120,000 accumulated E&P deficit remains.

d. Describe the effect of a \$100,000 cash distribution paid on October 1 to the sole shareholder of a calendar year corporation whose stock basis is \$25,000 when the corporation has an \$80,000 current E&P deficit and a \$100,000 accumulated E&P balance.

A.

The distribution is a \$100,000 dividend payable out of accumulated E&P. None of the current E&P deficit reduces accumulated E&P since the distribution is made on October 1.

B.

The distribution is a \$100,000 dividend payable out of accumulated E&P. The current E&P deficit reduces accumulated E&P.

C.

Accumulated E&P as of October 1 is \$40,0000 so that \$40,000 of the distribution is a dividend. Allocation of the current E&P deficit to the pre-October 1 period is accomplished by multiplying \$80,000 times 9/12ths. Of the remaining \$60,000, \$25,000 is a return of capital that reduces the shareholder's stock basis to zero, and the remaining \$35,000 is a capital gain.

D.

First, \$80,000 of the distribution is a dividend payable out of accumulated E&P. The remaining \$20,000 reduces current E&P.