Question

Assume a calendar-year corporation has a deficit in current E&P of ($100) and positive accumulated E&P of $100. Under this circumstance, a cash distribution of $100 to the corporation’s sole shareholder on June 30 will not be treated as a dividend because total E&P at December 31 is $0. True or false?

Answer 1

False.

Step-by-step explanation:

This is not true because at east a part of the distribution can be considered as a dividend distribution because last year's earnings were positive (+$100). Unless the company's losses can be specifically assigned to an event that occurred prior to June 30th, they must be prorated to the whole year. So by June 30th, the losses would have been only $50, so at least $50 of the dividends distributed on June 30th can be allocated to last year's earnings.