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Black Corporation and Tom each own 50% of Tan Corporation’s common stock. On January 1, Tan...

Black Corporation and Tom each own 50% of Tan Corporation’s common stock. On January 1, Tan has a deficit in accumulated E & P of $200,000. Its current E & P is $90,000. During the year, Tan makes cash distributions of $40,000 each to Black and Tom. Black's stock basis before the distribution is $30,000 and Tan's stock basis is $7,000. How are the two shareholders taxed on the distribution and what is the beginning accumulated E&P at the start of the the following year ?

Black Tom

Taxable dividend

Return of capital

Taxable gain

business   accounting   
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Answer #1

Black Corporation has a dividend income of $40000, of which only $8000 is taxed.

Tom has dividend income of $40000, for which he pays tax on the entire dividend at the reduced tax rates on dividends available.

Tom's accumulated E&P deficit balance at the end of the year is $190000

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