Question

# Sparrow Corporation is a calendar year taxpayer. At the beginning of the current year, Sparrow has...

Sparrow Corporation is a calendar year taxpayer. At the beginning of the current year, Sparrow has accumulated E & P of \$184,400. The corporation incurs a deficit in current E & P of \$258,160 that accrues ratably throughout the year. On June 30, Sparrow distributes \$110,640 to its sole shareholder, Libby. If Libby's stock has a basis of \$18,440, how is she taxed on the distribution?

Taxable dividend income in the amount of \$

Return of capital in the amount of \$

Capital gains in the amount of \$

1) Taxable dividend income = \$ 55,320

Accumulated E&P = \$ 184,400

Current E&P = \$ 258,160 (deficit)

E & P up to 30 June (half year) = \$ 258,160 / 2 = \$ 129,080

Net E&P balance = \$ 184,400 - \$ 129,080

= \$ 55,320

Therefore ,Out of the \$110,640 distribution made to Libby, the amount of \$55,320 will be taxable.

2) Return on capital = \$ 18,440

Return of capital = Libby's tax basis = \$ 18,440

3) Capital Gains = \$ 36,880

Capital gains = Excess distribution - Return of capital

Excess distribution = Total distribution - Taxable distribution

= \$ 110,640 - 55,320

= \$ 55,320

Capital Gains = \$ 55,320 - \$ 18,440

= \$ 36,880