Which of the Following Statements Best Describes the Priority of the Tax

question 79

Multiple Choice

Which of the following statements best describes the priority of the tax treatment of a distribution from a corporation to a shareholder?

• A)The distribution is a dividend to the extent of the corporation's E&P, then a return of capital, and finally gain from sale of stock.
• B)The distribution is a return of capital, then a dividend to the extent of the corporation's E&P, and finally gain from sale of stock.
• C)The distribution is a return of capital, then gain from sale of stock, and finally a dividend to the extent of the corporation's E&P.
• D)The shareholder can elect to treat the distribution as either a dividend to the extent of the corporation's E&P or a return of capital, followed by gain from sale of stock.

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Definitions:

Depreciation Expense

The allocation of the cost of a tangible asset over its useful life in a systematic manner.

Cash Dividend

A payment made by a company out of its profits to shareholders, typically in cash, representing a portion of the earnings allocated to each share of stock.

Stock Dividend

A distribution of additional shares of a company to its shareholders, instead of cash, usually based on a fixed ratio to the existing shares held.

Interest Expense

Interest expense is the cost incurred by an entity for borrowed funds.