Consequences of a Single Cash Distribution. Clover Corporation is a calendar year taxpayer. Connie owns all of its stock. Her basis for the stock is $10,000. On April 1 of the current (non-leap) year Clover distributes $52,000 to Connie. Determine the tax consequences of the cash distribution in each of the following independent situations: a. Current E&P of $15,000; accumulated E&P of $25,000.
b. Current E&P of $30,000; accumulated E&P of ($20,000).
c. Current E&P of ($73,000); accumulated E&P of $50,000.
d. Current E&P of ($20,000); accumulated E&P of ($15,000).

Following are the responses to the given points:

For a:

Connie will receive a dividend.

out of current E&P and out of accumulated E&P;

 returns capital to Connie, lowering her basis to zero;

The excess   is taxed as a capital gain.

E&P accumulated just at the start of next year would be zero dollars.

For b:

The current E&P yield is a dividend to Connie is

returns capital to Connie, reducing her basis to zero.

The excess  is taxed as a capital gain.

When next year begins, the accumulated E&P deficit is expected to stand at

For c:

On April 1 (in a non-leap year), Clover's accumulated E&P:

.

Therefore, the taxable as a dividend

remaining distribution is taxable as a capital gain and it is used to reduce Connie's stock to zero.

The remaining distribution is taxable as a capital gain.

Starting next year, E&P will have a accumulated deficit pro-rata deficit - dividend - residual deficit].

For d:

Starting with the return of the capital because E&P deficit

 returns of the capital which reduces Connie's basis to zero;

Excess is taxable as per the capital gain that is .

The accumulated E&P deficit at the starting of the next year is Learn more:

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