Question

Longhorn Company reports current E&P of $185,000 in 20X3 and a deficit of ($370,000) in accumulated E&P at the beginning of the year. Longhorn distributed $555,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $185,000. How is the distribution treated by the shareholder in 20Χ3? Multiple Choice Ο $555,000 dividend. Ο $185,000 dividend, $185,000 tax-free return of basis, and $185,000 capital gain. Ο () $185,000 dividend and $370,000 tax-free return of basis. Ο $0 dividend, $185,000 tax-free return of basis, and $370,000 capital gain.

Answer 1

OPTION - $185,000 Dividend, $185,000 tax free return of basis, and $185,000 Capital gain.

The distribution is a dividend to the extent of current E&P at December 31, 2013.The excess of $375,000 distribution is first a tax free return of basis to the extent of the shareholders tax basis and then capital gain.

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