Longhorn Company reports current E&P; of $160,000 in 20X3 and accumulated E&P; a

Question

Longhorn Company reports current E&P; of $160,000 in 20X3 and accumulated E&P; at the beginning of the year of negative $320,000. Longhorn distributed $480,000 to its sole shareholder on January 1. 20X3. The shareholder's tax basis in his stock in Longhorn is $160,000 How is the distribution treated by the shareholder in 20X3? Multiple Choice $160,000 dividend $160,000 dividend and $320,000 tax-free return of bosis SO dividend, $160,000 tax-free return of bosis, and $320,000 copital gain $160,000 dividend, $160,000 tax-free return of basis, and $160,000 capital gair

Explanation / Answer

Answer = D

160,000 Dividend and 160,000 Tax free return of basis and 160,000 Capital gain       

The Income to the extent of E&P of the company (i.e. $160,000) will be considered as Dividend and

From the remaining 320,000($480,000 – $160,000), $160,000 will be considered Tax free return of basis to the extent of Shareholder’s Tax basis in his stock (i.e. 160,000 in this case) and

The remaining $160,000(480,000 – 160,000 – 160,000) will be considered Capital Gain.

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