3) Green Corporation is a calendar-year taxpayer. All of the stock is owned by Evan. His basis for the stock is $35,000. On March 1 (of a nonleap year), Green Corporation distributes $120,000 to Evan. Determine the tax consequences of the cash distribution to Evan in each of the following independent situations:
Current E&P Accumulated E&P
a) $30,000 $100,000
b) 50,000 ( 50,000)
c) (73,000) 40,000
d) (20,000) ( 50,000)
To determine the tax consequences of the cash distribution to Evan in each of the given situations, we need to consider the concept of "earnings and profits" (E&P). E&P is a measure of a corporation's ability to pay dividends to its shareholders and is used to determine the tax treatment of distributions.
Let's go through each situation and calculate the tax consequences:
a) Current E&P: $30,000, Accumulated E&P: $100,000
In this situation, the distribution of $120,000 exceeds the corporation's current E&P ($30,000), but there is sufficient accumulated E&P ($100,000). This means that $30,000 of the distribution will be treated as a dividend, and the remaining $90,000 will be treated as a return of capital.
Evan's taxable dividend income would be $30,000. As for the return of capital, it is tax-free and would reduce Evan's basis in the stock. Evan's adjusted basis after the distribution would be $35,000 - $90,000 = -$55,000.
b) Current E&P: $50,000, Accumulated E&P: (-$50,000)
In this situation, the distribution of $120,000 exceeds the corporation's current E&P ($50,000), and there is no accumulated E&P available. Consequently, the entire $120,000 will be treated as a return of capital.
The distribution is considered as a return of capital, which is tax-free and reduces Evan's basis in the stock. Evan's adjusted basis after the distribution would be $35,000 - $120,000 = -$85,000.
c) Current E&P: (-$73,000), Accumulated E&P: $40,000
In this situation, the distribution of $120,000 exceeds both the current E&P deficit and the accumulated E&P. The total distribution will be treated as a return of capital.
Similar to scenario b), the distribution is considered as a return of capital, which is tax-free and reduces Evan's basis in the stock. Evan's adjusted basis after the distribution would be $35,000 - $120,000 = -$85,000.
d) Current E&P: (-$20,000), Accumulated E&P: (-$50,000)
In this situation, the distribution of $120,000 exceeds both the current E&P deficit and the accumulated E&P. The total distribution will be treated as a return of capital.
Again, similar to scenarios b) and c), the distribution is considered as a return of capital, which is tax-free and reduces Evan's basis in the stock. Evan's adjusted basis after the distribution would be $35,000 - $120,000 = -$85,000.
Keep in mind that negative bases are typically not allowed, so it is essential to consult a tax professional for further guidance in these circumstances.
Note: The tax consequences described above are based on general tax principles and assumptions. Tax laws can be complex, and individual circumstances may vary, so it is always recommended to consult with a qualified tax professional for personalized advice.
To determine the tax consequences of the cash distribution to Evan in each of the given situations, we need to calculate the amount of taxable dividend, return of capital, and any capital gain.
a) Current E&P: $30,000, Accumulated E&P: $100,000
In this scenario, the distribution of $120,000 ($30,000 Current E&P + $90,000 Accumulated E&P) will be treated as follows:
- $30,000 will be treated as a taxable dividend.
- $90,000 will be treated as a return of capital, reducing Evan's basis in the stock to $35,000 - $90,000 = -$55,000.
b) Current E&P: $50,000, Accumulated E&P: ($50,000)
In this situation, the distribution of $120,000 ($50,000 Current E&P + $70,000 Accumulated E&P) will be handled differently:
- The full distribution of $120,000 will be treated as a return of capital since there is insufficient current E&P to cover a taxable dividend. The return of capital reduces Evan's basis in the stock to $35,000 - $120,000 = -$85,000.
c) Current E&P: ($73,000), Accumulated E&P: $40,000
Here, since both the current E&P and accumulated E&P are negative, there is no positive E&P available for distribution. Therefore, the $120,000 distribution will be treated as a return of capital:
- The full distribution of $120,000 will be considered as a return of capital, reducing Evan's basis in the stock to $35,000 - $120,000 = -$85,000.
d) Current E&P: ($20,000), Accumulated E&P: ($50,000)
In this case, there is no positive E&P available for distribution. Hence, the entire $120,000 distribution will be treated as a return of capital:
- The full distribution of $120,000 will be considered as a return of capital, reducing Evan's basis in the stock to $35,000 - $120,000 = -$85,000.
Note: In situations where the return of capital exceeds the shareholder's basis, the excess is considered a capital gain. However, in the given scenarios, the return of capital has fully exceeded Evan's basis, resulting in no capital gain.