Question

A calendar-year corporation has negative current E&P of ($500) and accumulated positive E&P of $1,000. The corporation makes a $600 distribution to its sole shareholder.

Which of the following statements is true?
A. $0 of the distribution will be a dividend because current earnings and profits is negative.
B. Up to $600 of the distribution could be a dividend depending on the balance in accumulated earnings and profits on the date of the distribution.
C. $600 of the distribution will be a dividend because accumulated earnings and profits is $1,000.
D. $500 of the distribution will be a dividend because total earnings and profits is $500.

Answer 1

The correct statement is that up to $600 of the distribution could be a dividend, as the positive accumulated E&P of $1,000 covers the distribution amount.

Step-by-step explanation:

The question asked pertains to a corporation making a distribution to its shareholder and how that distribution should be treated given the corporation's earnings and profits (E&P). When a corporation makes a distribution to shareholders, it can be classified as a dividend to the extent of the corporation's E&P. If the current E&P is negative and the accumulated E&P is positive, the distribution can still be considered a dividend up to the amount of the positive accumulated E&P.

In this case, the corporation has negative current E&P of ($500) and positive accumulated E&P of $1,000. The corporation makes a $600 distribution to its shareholder. Therefore, the correct statement is: B. Up to $600 of the distribution could be a dividend depending on the balance in accumulated earnings and profits on the date of the distribution. Since the accumulated E&P is more than the distribution amount, the entire $600 could be considered a dividend.