On 12/31/x1, the balance in ZZ Corporation\'s accumulated E&P account was $200,0

Question

On 12/31/x1, the balance in ZZ Corporation's accumulated E&P account was $200,000.  For the year 20x2, ZZ had a deficit in current E&P of ($365,000).  Answer each of the following independent questions (allow for some rounding differences).

1) ZZ Corp. distributed $100,000 cash on March 1, 20x2. How much of this distribution would be characterized as dividend income to the shareholders who received it?

2) ZZ Corp. distributed $100,000 cash on July 1, 20x2. How much of this distribution would be characterized as dividend income to the shareholders who received it?

3) ZZ Corp. distributed $100,000 cash on October 1, 20x2. How much of this distribution would be characterized as dividend income to the shareholders who received it?

4) Referring to the other questions in this problem, if any part of a distribution is not treated as dividend income, how is this non-dividend portion of the distribution characterized by the shareholders who received it

Explanation / Answer

Defination of E&P: Earnings and profits are account which measures the corporation's ability to pay dividends.

Answers to the above questions:

1. Dividend Income is $200,000

2. All tax free

3. Tax free to the extent of the shareholders stock basis with any remaining distribution treated as capital gain.

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