Chapter C4
Corporate Nonliquidating Distributions
Discussion Questions
C4-1
Current E&P is computed on an annual basis by making adjustments to taxable income
so that it represents the corporation's economic ability to pay dividends out of the current year's
earnings.
The specific adjustments required are outlined in Table C4-1.
Accumulated E&P is
the sum of the current E&P (less distributions made out of current E&P) balances for all
previous years reduced by the sum of (1) all previous current E&P deficits and (2) any
distributions that have been made out of accumulated E&P.
p. C4-3.
C4-2
Distributions are deemed to come first from current E&P and then from accumulated
E&P.
Thus, if current E&P is positive, any distributions will be dividends to the extent of the
current E&P even if accumulated E&P is negative.
Also, if E&P is insufficient to cover all
distributions, distributions are deemed to come pro rata from current E&P and then in
chronological order from accumulated E&P.
pp. C4-7 and C4-8.
C4-3
a.
The distribution is a $100,000 dividend payable out of current E&P.
b.
$60,000 of the distribution is a dividend from current E&P.
The remaining
$40,000 is a return of capital.
$25,000 of the return of capital portion of the distribution
reduces the shareholder's basis in his stock to zero and the remaining $15,000 is a capital gain.
The $50,000 accumulated E&P deficit remains.
c.
All $100,000 of the distribution is a return of capital.
$25,000 of the distribution
reduces the shareholder's basis in his stock to zero and the remaining $75,000 is a capital gain.
A $120,000 ($60,000 + $60,000) accumulated E&P deficit remains.
d.
The distribution is a $100,000 dividend payable out of accumulated E&P.
None
of the current E&P deficit reduces accumulated E&P since the distribution is made on January
1.
If the distribution is made on October 1, the answers to parts a through c are the same.
However, in part d, accumulated E&P as of October 1 is $40,000 ($100,000 beginning balance -
$60,000 current deficit as of October 1) so that the distribution is a $40,000 dividend and a
$60,000 return of capital.
Allocation of the current E & P deficit to the pre-October 1 period is
accomplished here simply by multiplying $80,000 times 9/12ths.
(Alternatively, the actual
number of days could be used in which case the accumulated E&P deficit would be $59,836
($80,000 x 273/365) in a non leap-year tax year.)
$25,000 of the return of capital reduces the
shareholder's basis in his stock to zero and the remaining $35,000 is a capital gain.
pp. C4-7
through C4-9.
C4-1