Question

14. Which of the following statements best describes the role of current and accumulated earnings and profits in determining if a distribution is a dividend?

Multiple Choice

A. A distribution will only be a dividend if total earnings and profits (current plus accumulated) is positive at the time of the distribution.

B. A distribution can never be a dividend if current earnings and profits are negative.

C. At a minimum, some portion of the distribution will be a dividend if current earnings and profits for the year are positive, even if accumulated earnings and profits are negative.

D. A distribution will never be a dividend if current earnings and profit for the year are negative, even if accumulated earnings and profits is positive.

Answer 1

A distribution from a corporation is a dividend to the extent of the corporation’s current-year E&P and accumulated E&P. A distribution will be treated as a dividend to the extent of a corporation’s current-year E&P, even if the corporation has an accumulated E&P deficit.

Thus, in the following case, the following statements best describes the role of current and accumulated earnings and profits in determining if a distribution is a dividend:

C. At a minimum, some portion of the distribution will be a dividend if current earnings and profits for the year are positive, even if accumulated earnings and profits are negative.