c-ch4 - Chapter C4 Corporate Nonliquidating Distributions...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
C4-4 a. The distribution amount is the FMV of all property received. If the shareholder assumes or acquires a liability in connection with the distribution, it reduces the amount of the distribution (but not below zero). b. The distribution amount is a dividend to the extent it is paid out of the current and accumulated E&P of the corporation.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern