15. Beaver Company reports current E&P of $100,000 in 20X3 and accumulated E&P a

Question

15. Beaver Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of $200,000. Beaver distributed $400,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in her stock in Beaver is $200,000. How is the distribution treated by the shareholder in 20X3?

A. $400,000 dividend

B. $100,000 dividend, $200,000 tax-free return of basis, and $100,000 capital gain

C. $200,000 dividend and $200,000 tax-free return of basis

D. $300,000 dividend and $100,000 tax-free return of basis

Explanation / Answer

$300,000 dividend and $100,000 tax-free return of basis

The distribution is a dividend to the extent of current and accumulated E&P at December 31,2003. The excess distribution is a tax free return of basis because the shareholders tax basis in her stock exceeds the distribution

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