Chapter 2

Question 1

How id a a distribution from a corporation treated?

Answer 1

Look at the company’s earnings and profits and its shareholders basis where the the amount reduces earnings and profits 1st then shareholder basis.

Question 2

Shareholder distribution is a dividend when…

Answer 2

It is out of Earning and profits either current year or accumulated.

Question 3

What are the ordering rules of a corporations distribution to the shareholder?

Answer 3

1. Dividend to the extent of the corp E&P
2. Return of capital to the extent of basis
3. Remaining is a gain (gain on sale/exchange)

Question 4

With multiple distributions, explain how E&P is used up.

Answer 4

1st look at current E&P where it is allocated proportionally to each distribution (half & half, 1/3 or 2/3 ect..)
2nd Accumulated E&P is allocated first in time (first distribution uses as much as possible, then 2nd takes the rest)