Question

Identify which of the following statements is true.A.If both the current and accumulated E&P have deficit balances, a corporate distribution cannot be characterized as a dividend.B.A corporation recognizes gain when distributing money as a dividend to its shareholders.C.The shareholder's basis in property received in a nonliquidating distribution is the property's FMV reduced by liabilities assumed by the shareholder.D.All of the above are false.

Answer 1

Correct option is (A)

Step-by-step explanation:

Distributions from current E&P and thereafter from accumulated E&P are considered as taxable dividend. In case of deficit in current and accumulated E&P account, any corporate distribution is considered as return of capital distribution and not as dividends.

Dividends are taxable, however, return of capital is non-taxable income that reduces cost basis of shareholders.

So, statement A is true. Rest of the statements are false.