Husker Corporation reports current E&P of negative $200,000 in year 1 and accumulated E&P at the beginning of the year of $300,000. Husker distributed $200,000 to its sole shareholder on December 31, year 1. The shareholder's tax basis in her stock in Husker is $50,000. How is the distribution treated by the shareholder in year 1?

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Husker Corporation reports current E&P of negative $200,000 in year 1 and accumulated E&P at the beginning of the year of $300,000. Husker distributed $200,000 to its sole shareholder on December 31, year 1. The shareholder's tax basis in her stock in Husker is $50,000. How is the distribution treated by the shareholder in year 1?

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Bart · Answer 1

dividends = $100,000 tax free return of basis = $50,000 capital gains = $50,000

Explanation:

Husker's sole shareholder can treat the $200,000 he received from Husker in the following way:

dividends = accumulated E&P at the beginning of the year + current E&P = $300,000 + (-$200,000) = $300,000 - $200,000 = $100,000 tax free return of basis = $50,000 capital gains = total money received - dividends - return of basis = $200,000 - $100,000 - $50,000 = $50,000