Husker Corporation reports current E&P of negative $200,000 in year 1 and accumulated E&P at the beginning of the year of $300,000. Husker distributed $200,000 to its sole shareholder on December 31, year 1. The shareholder's tax basis in her stock in Husker is $50,000. How is the distribution treated by the shareholder in year 1?
A) $200,000 dividend
B) $100,000 dividend, $50,000 tax-free return of basis, and $50,000 capital gain
C) $100,000 dividend and $100,000 tax-free return of basis
D) $0 dividend, $50,000 tax-free return of basis, and $150,000 capital gain

Question

Quizplus · Accepted Answer

When current E&P is negative, the tax status of the dividend is determined by calculating accumulated E&P on the date of the distribution. Accumulated E&P at 12/31 year 1 is $100,000. The remaining distribution is a tax-free return of basis, with the excess treated as capital gain.

Husker Corporation Reports Current E&P of Negative $200,000 in Year