Question

Steven owns 100% of Wildhorse Inc stock, which he purchased 9 months ago on March 31 for $2,800. Wildhorse Inc distributes cash of $6,900 to Steven on December 31, when their earnings and profits (E&P) were $3,900. What is the tax effects to Steven from the payment of the cash distribution. Dividend Income, Reduction of basis of stock, Short-term capital gain/loss

Answer 1

The tax effect to Steven from the payment of the cash distribution on December 31 by Wildhorse Inc. is Dividend Income.

The cash distribution of $6,900 by Wildhorse Inc. above its current year's earnings of $3,900 does not reduce Steven's basis of stock and does not create a short-term capital gain.

Steven's ownership of Wildhorse Inc. = 100%

The purchase price of the stock on March 31 = $2,800

Cash distributed by Wildhorse Inc. on December 31 = $6,900

Earnings and profits for the year = $3,900

Thus, the tax effect shows that the cash distribution will be treated as dividend income to Steven.