Question

Pink Corporation has accumulated E & P of $100,000 on January 1, 2018. In 2018, Pink has current E & P of $130,000 (before any distribution). On December 31, 2018, the corporation distributes $250,000 to its sole shareholder, Sharon (an individual). Pink Corporation’s E & P as of January 1, 2019 is:

None of these.

$130,000.

$0.

($20,000.)

$100,000.

Answer 1

If the amount paid out as dividends exceeds both E&P and accumulated E&P, then the excess is treated as a return of capital, which is not taxable to the shareholders. Any return of capital does not affect accumulated E&P.

Thus, in current case $250,000 exceeds yhe toyal of accumulated and current year E and P by $20,000 which will be considered as return on capital.

Thus balance of Pink Corporation would be $0 as the excess would be considered as capital distribution.