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 tax-free return of basis, and $100,000 capital gain
C) $100,000 dividend and $200,000 tax-free return of basis
D) $0 dividend, $100,000 tax-free return of basis, and $200,000 capital gain

Question

Quizplus · Accepted Answer

The distribution is a dividend to the extent of current E&P at December 31, year 1. The excess $200,000 distribution is first a tax-free return of basis to the extent of the shareholder's tax basis and then capital gain.

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