Question

Company A distributes to its shareholder Bob a property whose fair market value is $100 and basis is $40. Assume that Company A has E&P of $10 and Bob’s basis in Company A is $20 at the time of the distribution. What will be tax consequences to Company A and Bob?

Answer 1

Consequences to Company A:

E&P increases by the capital gain on distribution of property that is $60. Then E&P is $70.

E&P then reduces to $0 as the amount of distribution is greater than E&P balance.

Capital gain recognized by the company is $60.

Consequences to Bob:

Bob’s dividend income is $70 that is the amount to the extent of E&P balance. Then $20 is considered return of capital and not taxable. And the balance $10 is taxable capital gain.