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:

$0 dividend; $20,000 return of capital.

$10,000 dividend; $10,000 return of capital (to extent of basis).

$20,000 dividend.

$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

$10,000 dividend; $10,000 return of capital (to extent of basis).

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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