A C Corporation has Accumulated E&P of $50,000 at the beginning of Year 1. In Year 1, it has Current E&P of $10,000. It distributes $70,000 to its sole shareholder on July 1. What is the tax treatment of the distribution?

Answer options:

$70,000 Dividend

$60,000 Dividend; $10,000 Return of Capital (to extent of basis)

$10,000 Dividend; $60,000 Return of Capital

$50,000 Dividend; $20,000 Return of Capital

How to approach this question

1. Calculate Total E&P: Accumulated ($50,000) + Current ($10,000) = $60,000. 2. Compare to Distribution: $70,000. 3. Dividend Portion: Extent of E&P ($60,000). 4. Excess Portion: $10,000. Treated as Return of Capital (reduces basis) then Capital Gain.

Full Answer

B.$60,000 Dividend; $10,000 Return of Capital (to extent of basis)✓ Correct

The distribution is a taxable dividend to the extent of E&P ($60,000). The remaining $10,000 is a tax-free return of capital (reducing stock basis) or capital gain if basis is exhausted.

Common mistakes

Ignoring Accumulated E&P.

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