Question

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

Answer 1

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.