Longhorn Company reports current E&P of $100,000 in year 1 and accumulated E&P at the beginning of the year of negative $200,000.Longhorn distributed $300,000 to its sole shareholder on January 1, year 1.The shareholder's tax basis in his Longhorn stock is $100,000.How is the distribution treated by the shareholder in year 1?
A)$300,000 dividend.
B)$100,000 dividend, $100,000 nontaxable return of basis, and $100,000 capital gain.
C)$100,000 dividend and $200,000 nontaxable return of basis.
D)$0 dividend, $100,000 nontaxable return of basis, and $200,000 capital gain.

Question

Quizplus · Accepted Answer

The distribution is first applied against the current E&P, resulting in a $100,000 dividend. The next $100,000 reduces the shareholder's basis in the stock to zero. The remaining $100,000 is treated as a capital gain.

Longhorn Company Reports Current E&P of $100,000 in Year 1