ACC610 Week 2 Discussion 1 Characterizing the Distribution

Week 2 - Discussion 1

Could you make up and answer your question using the following information?

Bob owns 100% of the stock of XYZ corporation. Bob’s tax basis in XYZ corporation as of January 1, 2015, is __$300_____. As of December 31, 2014, XYZ had accumulated E&P of __$500_____. During 2015, XYZ earns a current E&P of __$500______. On _December 31____ 2015, XYZ makes a distribution of _$1000______ to Bob.

• How is the distribution characterized (i.e., how much is a dividend, how much is a return of capital, how much is a capital gain)?

1. For the year 2015, XYZ gave Bob a total of $1,000.

2. XYZ had accrued $500 in income by year’s end of 2015

3. If Bob received a $500 dividend and a $300 return of capital, his stock basis would be reduced to zero.

4. Any remaining $200 after that would be deemed a capital gain.

• What is Bob’s tax basis in XYZ corporation after the distribution?

When distributed, a $300 tax basis is reduced to $0 by the same amount in return for capital.