ABC Corporation has current E&P of ($200,000). E&P at the beginning of the year was ($100,000). ABC Corp. makes a distribution of $350,000 to its sole shareholder on the least day of the year. The shareholder had a tax basis of $50,000. Determine the following (make sure that you show all calculations):
How much of the distribution is treated like a dividend to the shareholder?
After the distribution takes place, what is the shareholder's tax basis in the ABC Corp. stock after the distribution?
What is the balance in E&P for ABC Corp. the day after the distribution?
Discuss why E&P is measured. If E&P was not measured in the scenario presented above, what are the potential problems?
Requirements:
Back up your discussion with research from two scholarly sources (you may not use the course textbook to fulfill this requirement).
Your responses to the questions above as well as your analysis should be 4-5 pages in length not counting the title and reference pages, which you must include.
Your paper must be formatted according to the CSU-Global Guide to Writing and APA Requirements.
I need help proof reading my paper That I have attached bellow and the original question above.
If the corporation has a current E&P deficit and an accumulated E&P deficit, none of the distributions are treated as dividends. All distributions are treated as a return of capital until the shareholders stock basis is reduced to zero. Any additional amounts are treated a capital gain.
In case of ABC Corp, since the distribution of 350000 is considered to be neither from Current E & P nor Accumulated E & P, but instead as return on capital, which will be tax free to the shareholder to the extent of the adjusted tax basis i-e 50000. Return on capital distributions in excess of tax basis i-e 300000 (350000-50000) will be treated as capital gains.
Balance in accumulated E & P of ABC corp. will be NIL after day of distribution.
Since Shareholder tax basis is 50000, will be considered as tax free return of capital . Excess received will be treated as capital gain.
Since the beginning and current E&P is negative they will not consider any distribution as dividend.After the distribution the tax basis in the ABC corp. stock will still remain same and it is 50000
Balance in E&P = -100000 - 200000 + 350000 = - 650000
Earning and profit is required for calculating stockholder equity. if you do not find it then the balance sheet cannot be formed and it is published
Distribution treated as dividend
Beginning E&P......................................................100,000
Current E&P.........................................................200,000
Total E&P............................................................300,000
Distribution.........................................................(350,000)
Return on capital....................................................(50,000)
Distribution treated as dividend:
Distribution..........................................................350,000
Return on capital...................................................(50,000)
........................................................................300,000
The taxability of ABC corporations $350000 distribution their sole shareholder is determined under section 316 and 301 (C). To the extent of ABC Corporations current balance of $200000 , the distribution is treated as dividend.
Thus the Shareholder includes $200000 in taxable income under diction 301 (C)( 1).Of the remaining $150000 distribution $50000 is returned as the Share holders capital, and reduces Shareholders tax basis from $50000 to $0..The remaining $100000 distribution is treated as the sale of the stock, generating Capital Gain .
Shareholders tax basis after stock distribution
Taxable dividend..................................................................300,000
Nontaxable return of capital.......................................................50,000
Tax basis..............................................................................50,000
Tax basis
Taxable dividend..................................................................300,000
Tax basis..............................................................................50,000
Taxable capital gain................................................................250,000
Balance in E&P
Ending E&P = Beginning accumulated E&P +Current E&P -Distribution out of EP
Beginning E&P..................................................................100,000
Current E&P.....................................................................200,000
Total E&P........................................................................300,000
Division distribution...........................................................(300,000)
Balance Nil
Why E&P is measured
E&P is used to help in measuring the economic ability of a corporation to pay dividends. It assists corporations to know how much of the distribution to shareholders is out of the accumulated & current E&P. This is because any distribution which is not made from E&P is paid from stocks. It is therefore helpful in determining how much of the distribution should be a nontaxable return.
The primary purpose of calculating E & P is to determine whether a distribution represents a taxable dividend, a non taxable return of shareholders capital, or capital gain to the recipient shareholder.
Section 316 defines a dividend as an distribution of property made by a Corporation out of current or accumulated E & P. and section 301 (C) provides that distribution of constituting dividend must be included in gross income of the shareholder while amount distributed in excess of those considered as dividend are first treated as return of shareholders return of capital to the extent shareholders stock basis , with any remaining distribution treated as gain from the sale of stock resulting in capital gain.
Potential problems if E&P was not measured in the scenario presented above
Stock dividends could have been subjected to tax. It would have not been possible to know how much of the amount distributed could have been treated as nontaxable return. potential problem is that if E & P was not measured we would have treated $350000 as dividend but in the above scenario it is not dividend as E & P is negative and it is return on capital.