Question

Heather owns 10% of the stock of a family-controlled corporation known as Moore Corp. Moore Corp has elected to file a Form 1120 as a C-corp. Heather’s basis in her stock on January 1, 2019 was $15,000. During the calendar year 2019 Moore Corp generated new E & P (Earnings and Profits) of $90,000 and began the year with Accumulated E & P of $120,000. In 2018 Moore Corp declared a distribution payable on December 1, 2018, of $400,000. The Board of Directors voted to distribute this same amount on December 1, 2019 . How will Heather’s 10% share of the total 2019 distribution be taxed on her 2019 Federal Income Tax return?

Answer 1

Distribution to the extent of E&P balance is taxable as dividend. Excess is return of basis in stock and further distribution is taxable capital gain.

In the given case taxpayer's share of E&P = $210,000 X 10% = $21,000.

Taxpayer share of distribution = $400,000 X 10% = $40,000

Distribution is taxable as dividend to the extent of $21,000 share of E&P.

Balance distribution = $40,000 - $21,000= $19,000

It is treated as non-taxable return of capital to the extent of $15,000 basis in stock.

Balance distribution = $19,000 - $15,000 = $4,000

It is taxable as capital gain.

Thus, distribution is $21,000 dividend income, $15,000 non-taxable return of capital, and $4,000 capital gain.

Please rate.