Inca Company reports a deficit in current E&P of ($115,000) in the current year and accumulated E&P at the beginning of the year of $230,000. Inca distributed $330,000 to its sole shareholder on January 1 of the current year. How much of the distribution is treated as a dividend in the current year?

Question

BlackTom AI · Accepted Answer

Question restatement: Inca Company has a deficit in current E&P of (115,000) for the current year, and at the beginning of the year it has accumulated E&P of 230,000. A distribution of 330,000 is made to the sole shareholder on January 1 of the current year. Which portion of the distribution is treated as a dividend in the current year?

Option 1: $0. This would imply none of the distribution is treated as a dividend, which is incorrect because distributions generally reduce E&P first before any return of capital, and there is some E&P still available at the distribution date.

Option 2: $115,000. This would correspond to using the current-year deficit to reduce accumulated E&P. However, the distribution occurred on January 1, before the current-year deficit was realized, so the deficit cannot retroactively reduce the amount available for the distribution at that date.

Option 3: $230,000. This matches the accumulated E&P available at the beginning of the year, i.e., the amount of E&P that is available for a dividend from the prior year before the current-year deficit is incurred. Since the January 1 distribution occurs before the current-year deficit, the full 230,000 can be treated as a dividend first.

Option 4: $330,000. This would imply the entire distribution is treated as a dividend, leaving 0 as a return of capital, but if there is only 230,000 of E&P available at the time of distribution, only 230,000 can be treated as a dividend from E&P, with the remainder potentially treated as a return of capital up to the stock basis.

Further explanation of the underlying rule: In corporate distributions to shareholders, the amount of the distribution is first satisfied from E&P (prior and current year) available as of the distribution date. Since the distribution on January 1 precedes the current-year E&P deficit, the 230,000 accumulated E&P at the beginning of the year is the amount available to be treated as a dividend. Any remaining distribution beyond available E&P would be a return of capital to the extent of basis, etc. The current-year deficit would affect E&P only after it is incurred, so it does not reduce the dividend amount for a distribution made at the very start of the year.

Summary assessment: The correct choice is the option that reflects 230,000 as the dividend amount for the distribution made on January 1, before the current-year deficit occurred, with the remaining 100,000 potentially treated as a return of capital if applicable.

SU25-BL-BUS-A329-2695 Quiz 19

Inca Company reports a deficit in current E&P of ($115,000) in the current year and accumulated E&P at the beginning of the year of $230,000. Inca distributed $330,000 to its sole shareholder on January 1 of the current year. How much of the distribution is treated as a dividend in the current year?

View Explanation

Log in for full answers

Similar Questions

Pheasant Corporation, a calendar year taxpayer, has $400,000 of current E & P and a deficit in accumulated E & P of $180,000. If Pheasant pays a $600,000 distribution to its shareholders on July 1, how much dividend income do the shareholders report?

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler