Beaver Company reports current E&P of $100,000 in year 1 and accumulated E&P at the beginning of the year of $200,000. Beaver distributed $400,000 to its sole shareholder on January 1, year 1. The shareholder's tax basis in her stock in Beaver is $200,000. How is the distribution treated by the shareholder in year 1?
A) $400,000 dividend
B) $100,000 dividend, $200,000 tax-free return of basis, and $100,000 capital gain
C) $200,000 dividend and $200,000 tax-free return of basis
D) $300,000 dividend and $100,000 tax-free return of basis

Question

Quizplus · Accepted Answer

The distribution is a dividend to the extent of current and accumulated E&P at December 31, year 1. The excess distribution is a tax-free return of basis because the shareholder's tax basis in her stock exceeds the distribution.

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