Question

(a) On July first of year two, X Corp., a calendar year taxpayer, made distributions of $20,000 to A, its sole shareholder, whose stock had a $5,000 basis. No other distributions were made in year 2. As of December 31 of year one, X Corp. had no earnings and profits. In year two, X Corp. had earnings and profits of $15,000 as of July first, but only $5,000 for the entire year. Determine the tax consequences in the following situation.

(b) Suppose in (a) that X Corp. had an accumulated earnings and profits deficit of $15,000 as of December 31 of year one. Determine the tax consequences in this situation.

(c) Suppose in (a) that X Corp. had an accumulated earnings and profits of $15,000 as of December 31 of year one, and that in year two, X Corp. had a $15,000 earnings and profits deficit on July first, but a $5,000 earnings and profits account for the entire year. Determine the tax consequences in this situation.

(d) Suppose in (c) that X Corp. had $15,000 of current earnings and profits as of July first of year two, but a deficit of $20,000 for the entire year.Determine the tax consequences in this situation.

Answer 1

Tax Consequences in each of the following situations

A)

Particulars	Amount (in $)
Earnings upto 31 Dec of Year one	0
Accumulated earnings and profits up to July first	15000
Earnings for the entire year	5000

B) $5000 is considered as dividend as it will be treated as distribution made from current   E&P.$5000 treated as return of capital, Excess of stock basis of $10,000 will be treated as capital gain.

C) Distribution of $20,000 can be apportioned as, $15,000 shall be treated as dividend, $5000 treated as return of capital.

D) Distribution of $20,000

Accumulated profits upto 1^st July-$30,000 - $20000*6/12(10,000)=$20,000.

So Distribution of full $20,000 shall be treated as dividend.