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Longhorn Company reports current E&P of $130,000 in 20X3 and accumulated E&P at the beginning of...

Longhorn Company reports current E&P of $130,000 in 20X3 and accumulated E&P at the beginning of the year of negative $260,000. Longhorn distributed $390,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $130,000. How is the distribution treated by the shareholder in 20X3?

Multiple Choice

  • $130,000 dividend.

  • $130,000 dividend, $130,000 tax-free return of basis, and $130,000 capital gain.

  • $130,000 dividend and $260,000 tax-free return of basis.

  • $0 dividend, $130,000 tax-free return of basis, and $260,000 capital gain.

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Answer #1

Ans: The correct option for the above answer is Option B i.e  $130,000 dividend, $130,000 tax-free return of basis, and $130,000 capital gain.

Accumulated E&P at beginning -260,000

Current E&P is $130,000

Distributed $390,000 to sole shareholder on January 1, 20X3

Shareholder tax basis is $130,000

Shareholder will treat $390,000 as follows:

Now as the current E&P is 130,000

so out of 390,000 , $130,000 will be treated as dividend and $130,000 as tax free return of basis and remaining 130,000 will be capital gain.

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