ExpertMedium1 markMultiple Choice
CPA · Question 40 · Area II: Entity Tax Compliance
A C Corporation has current E&P of $10,000 and accumulated E&P of ($50,000) (deficit). It distributes $20,000 to its sole shareholder. What is the tax treatment?
A C Corporation has current E&P of $10,000 and accumulated E&P of ($50,000) (deficit). It distributes $20,000 to its sole shareholder. What is the tax treatment?
Answer options:
A.
$0 dividend; $20,000 return of capital.
B.
$10,000 dividend; $10,000 return of capital (to extent of basis).
C.
$20,000 dividend.
D.
$0 dividend; $20,000 capital gain.
How to approach this question
Nimble Dividend Rule: If Current E&P is positive, distributions are dividends up to that amount, regardless of the Accumulated E&P deficit.
Full Answer
B.$10,000 dividend; $10,000 return of capital (to extent of basis).✓ Correct
IRC §316(a). Dividends are distributions out of Current E&P OR Accumulated E&P. If Current E&P is positive ($10,000), that amount is a taxable dividend, even if there is a large accumulated deficit.
Common mistakes
Netting Current and Accumulated E&P before determining dividend status.
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