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RD, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 8784
Experience:  CPA, MBA, Over 10 yrs of experience in tax planning and business consulting..
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On January 1, Tanager Corporation (a calendar year taxpayer)

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On January 1, Tanager Corporation (a calendar year taxpayer) has accumulated E & P of $190,000. During the year, Tanager incurs a net loss of $240,000 from operations that accrues ratably. On June 30, Tanager distributes $100,000 to Sharisa, its sole shareholder, who has a basis in her stock of $40,000. How much of the $100,000 is a dividend to Sharisa?
a. $0.
b. $70,000.
c. $60,000.
d. $50,000.
e. None of the above.
Please explain your answer.
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If accumulated E & P is positive and current E&P is a deficit, net both at date of distribution

If balance is zero or a deficit, distribution is a return of capital

If balance is positive, distribution is a dividend to the extent of the balance

Any current E & P is allocated ratably during the year unless the parties can show otherwise

So on June 30 -

Accumulated E&P will be $70,000 ($190000 less 240000/12*6 (loss upto the date of distirbution))

So distribution upto $70K is dividend and balance is return of capital.

Answer is b.

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