Discussion Question $5-2($LO$.3)$

Classify the effect of a distribution in a year when the distributing corporation has the following conditions.

a$.$ A deficit in accumulated E & P and a positive amount in current E & P$.$

If a distributing corporation has a deficit in accumulated E & P and a positive amount in current E & P$,$ a distribution during the year is a

return of capitalcapital gaintaxable dividend

to the extent of current E & P$.$ Current and accumulated E & P

return of capitalareare not

netted.

b$.$ A positive amount in accumulated E & P and a deficit in current E & P$.$

If the corporation has a positive amount in accumulated E & P and a deficit in current E & P$,$ a distribution either is a

capital gain or return of capitaltaxable dividend or capital gaintaxable dividend or a return of capital

$,$ depending on the resulting balance in E & P when current and accumulated E & P are netted.

c$.$ A deficit in both current and accumulated E & P$.$

If there is a deficit in both current and accumulated E & P$,$ a corporate distribution is treated as a

return of capitalcapital gaintaxable dividend

to the extent of the shareholder's basis in his or her stock. Any excess is a

return of capitalcapital gaintaxable dividend

$.$

d$.$ A positive amount in both current and accumulated E & P$.$

If there is a positive amount in both current and accumulated E & P$,$ to the extent of the positive balance in both amounts, the distribution is a

return of capitalcapital gaintaxable dividend

$.$