Question

Elk Company reports negative current E&P of $215,000 and positive accumulated E&P of $330,000. Elk distributed $230,000 to its sole shareholder, Barney Rubble, on December 31, 20X3. Barney's tax basis in his Elk stock is $86,250. What is the tax treatment of the distribution to Barney and what is his tax basis in Elk stock after the distribution?

Answer 1

The $230,000 receipts of the distribution can be split as follows :-

$100,000 Dividend income ,

$86,250 Tax free return of capital and

$43,750 as capital gains.

His tax basis in Elk stock post this distribution is 0.

Barney reports a dividend income of $100,000, the difference between accumulated earnings & profits and distribution. The $100,000 receipt first reduces the basis in Elk company stock and excess is treated as a capital gain on the sale of the stock. The new tax basis is $0.