Why is it necessary to distinguish between current and accumulated E and P?

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Why is it necessary to distinguish between current and accumulated E and P?



A.

Distributions are deemed to come first out of current E&P and then out of accumulated E&P, so if current E&P is positive, any distributions will be dividends to the extent of current E&P. However if E&P is insufficient to cover all distributions, distributions are deemed to come pro rata out of current E&P and then in chronological order out of accumulated E&P.

 



B.

Distributions are deemed to come first out of accumulated E&P and then out of current E&P, so if accumulated E&P does not cover the full distribution, the remaining is taken from current E&P. However, if current E&P is still insufficient to cover the remaining distribution, the distributions are treated as a return of capital and reduce the shareholder's stock basis.



C.

Distributions are deemed to come first out of current E&P and then out of accumulated E&P. However if the distribution is for the sole intent of avoiding tax, the distribution is disallowed and the full amount that would have been paid out is deemed a capital gain, and required to be taxed at the corporate level.



D.

Distributions can come out of accumulated E&P or current E&P first. The order does not matter, but once a method has been chosen, the corporation must stay with that method. However, if the distribution exceeds the total E&P, the remainder will be dividends.

 

 
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