A C Corporation has Accumulated E&P of (,000) (deficit) at the beginning of the year. Current E&P for the year is ,000. The corporation distributes ,000 to its sole shareholder. How is the distribution taxed?

Answer options:

0 Dividend; ,000 Return of Capital

,000 Dividend; ,000 Return of Capital (to extent of basis)

5,000 Dividend; ,000 Return of Capital

,000 Dividend

How to approach this question

Check E&P states: 1. Current (+) / Accum (+) -> All Div. 2. Current (+) / Accum (-) -> Div to extent of Current (Nimble Dividend Rule). 3. Current (-) / Accum (+) -> Net them at date of distribution.

Full Answer

B.,000 Dividend; ,000 Return of Capital (to extent of basis)✓ Correct

When Current E&P is positive and Accumulated E&P is negative, distributions are dividends to the extent of Current E&P. The deficit in Accumulated E&P is ignored for this calculation.

Common mistakes

Netting positive current E&P with negative accumulated E&P.

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