Question

Your client, Heron Corporation, has a deficit in accumulated E & P of $300,000. Starting this year, it expects to generate annual E & P of $150,000 for the next four years and would like to distribute this amount to its shareholders. How should Heron Corporation distribute the $600,000 over the four-year period to provide the least amount of dividend income to its shareholders (all individuals)? In a letter to your client, make appropriate suggestions on how this should be done. Also prepare a memo for your firm’s file. Heron Corporation’s address is 12 Nature Trail Way, Daytona Beach, FL 32114.

Answer 1

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Answer: Janoary २८, २०२० Heron corporation 12 Nature Trail way Daytona Beach, FL 32114. Dear president of Heron corporation : This letter is in response to your question concerning the tax. Consequences on the planned distribution of $6000oo to your Shareholders over the next four years car conclusion is based upon the facts as outlined in your Aprila letter and any change in these facts may cause such conclusion to be in accurate. Heron corporation has a deficit of in accomolated Eup of $ 3000oo as of January 1, 2019 Starting this year, Heron corporation expects to generate annual E&p of $150000 for the next four years and would like to distribute this amount to its shareholders. The corporation's objective os to make the distribution in a manner that causes the least amant of dividend income to its Shareholders.

Heron Corporation should not make a distribution in 2019 but distribute $ 300 000 on December 31,2020. again make no distribution in 2021 but distribute the remaining $300000 on December 31, 2022 By distributing $300000 every other year, only half of the distribution, cor) $150000 is taxed to the Shareholders as dividend income. Because Eye for 2019 ($150000) is netted with the deficit in accomolated Eup ($30000o), at the end of 2019 there isa deficit in E&P Cirocool when a distribution of $300 000, is made in 2020, only $ 150000 is taxed, as dividend income is limited to corrent Eup ($150000). This is again the case in 2021 and 2022 on the other hand if $150000 is distributed each year, the shareholders are taxed on entire distribution because it is covered by wrrent Eup. The deficit in accumulated Epp does not cause part of the distribution to be nontaxable. Should our you need conclusion, additional information do not hesitate to Cor) need to clarity call me on. yours Ashok sincerely, komar M, CPA. partner

File Memorandum Tax January 26, 2020 FROM: Ashok Kumar M. SUBJECT: Heron Corporation Today i talked to the president of Heron Corporation with respect to the April, 2019 letter Heron Corporation has a deficit in its accomulated Exp of $ 300000 as of January 1, 2019 Starting in 2019, Hevon Corporation expects to generate annual Exp of $150000 for next four years and wishes to distribute this amount to its Shareholders Heron Corporation wants to know how distribute the $ 6ooooo over a four-year period in order to the least amount of dividend income to its Shareholders Call andividuals). At issue : when a corporation is it possible to Structure a part of the distribution will even though current Eup has a deficit in accomolated EUR corporate distribution so that a not constitute dividend income is available ? Conclosion: If theron corporation does not make a distribution in 2019 cor) in 2021, only half of the $ 6000oo total distribution, cor) $300000 Constitutes dividend income. This is the case. because in 2019 the $ 150000 corrent Eup is netted with the defit in Eup of $300000 to reduce the defict in accomodated Eup to $180ooo as of December 31, 2019 In 2020, when Heren corporation distributes $300 000 to its shareholders, only $ 150000 of the distribution is dividend income. This is so because there is a & 150000 deficit in accomolated Eppe but the distribution is taxed to the extent of corrent Eup.

As corrent Eup is only $150000 dividend income is limited to this amount. The remaining & 150000 is a return of capital to the shareholders. After the distribution in 2020 accomulated Eup remains a deficit of $ 150000 (distributions cannot increase a deart). In 2021, Heron makes no distribution. Thus, at the end of 2021, accomolated Epp is Bero (the $ 150000 deficit is netted with the $150000 corrent Eup for 2020). In 2022, when Heron Corporation has corrent Exp of l 150000, it makes a distribution of $300000- only & 150000 of which represents dividend income. The remaining & 150000 is a return of capital .