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Taxes and Shares Distributions

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?

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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 ...

Solution Summary

Taxes and shares distributions are examined. The fair market value of the EI Toro stock is determined.