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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 $

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Answer #1

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

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