Question

# As of January 1, 2019, Mercedes Corporation (a calendar year taxpayer) had a positive balance in...

As of January 1, 2019, Mercedes Corporation (a calendar year taxpayer) had a positive balance in Accumulated Earnings and Profits (E&P) of \$100,000. For the tax year of 2019, Mercedes Corporation’s Current Earnings And Profits (E&P) was a “Deficit” (negative) (\$60,000). On June 30, 2019, Mercedes Corporation distributed \$120,000 to its sole shareholder. The amount of the distribution that is a Taxable Dividend income to the shareholder is:

1. \$40,000
2. \$100,000
3. \$30,000
4. \$70,000

Ans :

Deficit in Current E&P equals \$60,000 for the year 2019

Thus on Date of Distribution i.e. June 30 Deficit in Current E&P = \$60,000 * 6/12 = \$30,000

Accumulated E&P positive balance on 1Jan = \$100,000

Therefore,

Net Accumulated E&P balance on June 30 = Accumulated E&P at beginning of the year - Current E&P Deficit on June 30
Net Accumulated E&P balance on June 30 = \$100,000 - \$30,000
= \$70,000

Ans : Thus \$70,000 of the distribution is the Taxable Dividend income to the shareholder.

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