Question

At the beginning of the year, Myrna Corporation (a calendar year taxpayer) has E & P of $66,050. The corporation generates no additional E & P during the year. On December 31, the corporation distributes $99,075 to its sole shareholder, Abby, whose stock basis is $19,815. How is the distribution treated for tax purposes?

If an amount is zero, enter "0". As a result the distribution Abby has the following:

• Dividend income: $

• Return of capital: $

• Capital gain: $

• Stock basis after the distribution: $

Answer 1

Solution:

• Dividend income	$       66,050	Amount distributed as E&P
• Return of capital	$       19,815	Distribution of cash in excess of E&P are treated as a return of shareholders` basis in the stock to an extent of stock basis.
• Capital gain	$       13,210	Capital Gain=Corporation distribution-Dividend Income-Stock basis [99075-66050-19815]
• Stock basis after the distribution	$                -	As all the capital has been refunded through distribution, stock basis will become Zero.