Question

Answers without showing calculations/explanations, will not recelve credit. Austin Company reports positive current E\&P of $200,000 and a deficit in accumulated E\&P of ($300,000). Austin distributed $250,000 to its sole shareholder, Betsy Bevo, on December 31,20×3. Betsy's tax basis in her stock is $125,000. a) How much of the $250,000 distribution is treated as a dividend to Betsy

Answer 1

Only $200,000 of the $250,000 distribution from Austin Company to Betsy Bevo is treated as a dividend, corresponding to the current E&P of the company. The remainder reduces the accumulated E&P deficit.

Step-by-step explanation:

When assessing how much of the $250,000 distribution is treated as a dividend to Betsy, one must consider the current and accumulated E&P (Earnings and Profits) of the company. Austin Company reports a positive current E&P of $200,000 and a deficit in accumulated E&P of ($300,000). The distribution to the shareholder is done in the following order: first against current E&P, then against accumulated E&P.

For this case, the entire current E&P of $200,000 will be treated as a dividend. The remaining $50,000 of the distribution ($250,000 - $200,000) will reduce the accumulated E&P deficit but will not be treated as a dividend since the accumulated E&P is still in deficit after current E&P is exhausted. Therefore, only $200,000 of Betsy's distribution is treated as a dividend.