Question

Consequences of a Single Cash Distribution. Clover Corporation is a calendar year taxpayer. Connie owns all of its stock. Her basis for the stock is $10,000. On April 1 of the current (non-leap) year Clover distributes $52,000 to Connie. Determine the tax consequences of the cash distribution in each of the following independent situations:

a. Current E&P of $15,000; accumulated E&P of $25,000.
b. Current E&P of $30,000; accumulated E&P of ($20,000).
c. Current E&P of ($73,000); accumulated E&P of $50,000.
d. Current E&P of ($20,000); accumulated E&P of ($15,000).

Answer 1

Following are the responses to the given points:

For a:

$\bold{\ 40,000}$ Connie will receive a dividend.

$\bold{\ 15,000}$ out of current E&P and $\bold{\ 25,000}$ out of accumulated E&P;

$\bold{\ 10,000}$  returns capital to Connie, lowering her basis to zero;

The excess  $\bold{\ 2,000}$ is taxed as a capital gain.

E&P accumulated just at the start of next year would be zero dollars.

For b:

The current E&P yield is a dividend to Connie is $\bold{\ 30,000}$

$\bold{\ 10,000}$ returns capital to Connie, reducing her basis to zero.

The excess $\bold{\ 12,000}$  is taxed as a capital gain.

When next year begins, the accumulated E&P deficit is expected to stand at $\bold{(\ 20,000)}$

For c:

On April 1 (in a non-leap year), Clover's accumulated E&P:

$\to \bold{\ 50,000 - [(\frac{\ 73,000}{365})\times 90]}\\\\\to \bold{\ 50,000 - [(200)\times 90]}\\\\\to \bold{\ 50,000 - [18000]}\\\\\to \bold{\ 32,000}$.

Therefore, the taxable as a dividend $\bold{\ 32,000}$

$\bold{\ 10,000}$ remaining distribution is taxable as a capital gain and it is used to reduce Connie's stock to zero.

The remaining $\bold{\ 10,000}$ distribution is taxable as a capital gain.

Starting next year, E&P will have a $\bold{\ 55,000}$ accumulated deficit $\bold{[\ 50,000 - \ 18,000}$ pro-rata deficit -$\bold{\ 32,000}$ dividend - $\bold{\ 55,000}$ residual deficit].

For d:

Starting with the return of the capital because E&P deficit

$\bold{\ 10,000}$  returns of the capital which reduces Connie's basis to zero;

Excess $\bold{\ 42,000 }$ is taxable as per the capital gain that is $\bold{(52,000-10,000)}$.

The accumulated E&P deficit at the starting of the next year is $\bold{(\ 35,000)}$Learn more:

brainly.com/question/17044636