Question

At the beginning of the current year, Inga Corporation (a calendar year taxpayer) has accumulated E & P of $30,000. During the year, Inga incurs a $12,000 loss from operations that accrues ratably. On April 1, Inga distributes $20,000 in cash to Galina, its sole shareholder. How is Galina taxed on the distribution?

If an amount is zero, enter "0".

Of the 20,000 distribution, $___ is taxed as a dividend and $___ represents a return on capital.

Answer 1

Of the 20,000 Distribution, $ 20,000 is taxed as a dividend and $ 0 represent a return on capital

To determine the amount of dividend income, the balances of both accumulated and current E & P as of April 1 must be netted because of the deficit in current E & P. As one-forth of the loss (or $3,000) is deemed to have occurred through April 1, the $30,000 in accumulated E & P is reduced by the current E & P deficit through april 1 ($3,000). The $27,000 balance in E & P triggers dividend income for this portion of the distribution.