1) Longhorn Company reports current E&P of $100,000 in 20X3 and accumulated E&P at the beginning of the year of negative $200,000. Longhorn distributed $300,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $100,000. How is the distribution treated by the shareholder in 20X3?
2) El Toro Corporation declared a common stock dividend to all shareholders of record on June 30, 20X3. Shareholders will receive 1 share of El Toro stock for each 2 shares of stock they already own. Raoul owns 300 shares of El Toro stock with a tax basis of $60 per share. The fair market value of the El Toro stock was $100 per share on June 30, 20X3. What are the tax consequences of the stock dividend to Raoul?
1. Dividends are first paid out of current E&P. In this problem, the current taxable dividend portion from current E&P is $100,000.
The second $100,000 paid is a tax free return of the shareholder's basis in the stock. This is not taxable because the purchase of stock was not a taxable event initially. It is acceptable to recover stock basis for ...
Taxes and shares distributions are examined. The fair market value of the EI Toro stock is determined.