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Prior to 2019, X-Men Corporation had accumulated earnings and profits of $12,000, and during 2019 its...

Prior to 2019, X-Men Corporation had accumulated earnings and profits of $12,000, and during 2019 its net current earnings amounted to $18,000. Enjoying excellent cash flow at the end of 2019, X-Men distributed $45,000 cash to its sole stockholder, Arnold, who had purchased his stock for $11,000 several years ago. How is this distribution treated for tax purposes by Arnold?

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Answer #1

Cash received as distribution from corporation have variety of treatments, depends on situations, if the corporations have enough current and accumulated earnings and profits, it is regarded as taxable dividends, and any extra cash distribution beyond current and accumulated E&P, goes to reduce the shareholder tax basis is stock, and still any extra payment left, then it goes towards capital gain.

Here, X-Men Corporation AE&P = $12,000

Current Earnings = $18,000

Total E&P = $30,000

So , first $30,000 is taxable dividend, next $11,000 is return of capital, and balance $4,000 is capital Gain.

(30000+11000+4000) = $45,000 cash distribution

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