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.
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