Question

At the beginning of the year, Teal Corporation had E & P of $210,000. On March 30, Teal sold an asset at a loss of $200,000. For the calendar year, Teal incurred a deficit in current E & P of $305,000, which includes the $200,000 loss on the sale of the asset. If Teal made a distribution of $50,000 to its sole shareholder on April 1 and the shareholder had a basis in her stock of $72,000, how will the shareholder be taxed?

If an amount is zero, enter "0".

The shareholder has the following:

Dividend income: $ *ANSWER*

Return of capital: $ *ANSWER*

Capital gain: $ *ANSWER*

Answer 1

Unless otherwise mentioned it is assumed that deficit is evenly distributed throughout the year.

However it's mentioned that loss on sale of asset is before the distribution.

Remaining deficit i.e. $305000 - $200000 = $105000 will be considered as evenly distributed. So deficit upto 1 April

= $105000*3/12 = $26250

So total deficit upto 1 April = $26250 + $200000 = $226250

Since after adjusting it with opening E&P , it's net deficit. ($226250 -$210000) Hencet distribution will be considered as return of capital. If it was positive E & P then it would have been considered as dividend.

Also return of capital upto tax basis will be exempt. Above tax basis it will be capital gain

Hence

Dividend income = $0

Return of capital = $50000

Capital gain = $0

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