Exit Corporation Has Accumulated E&P of $24,000 at the Beginning

question 61

Multiple Choice

Exit Corporation has accumulated E&P of $24,000 at the beginning of the current tax year. Current E&P is $20,000. During the year, the corporation makes the following distributions to its sole shareholder who has a $22,000 basis for her stock. The treatment of the $15,000 August 1 distribution would be

• A)$15,000 is taxable as a dividend; $5,000 from current E&P and the balance from accumulated E&P.
• B)$15,000 is taxable as a dividend from accumulated E&P.
• C)$4,000 is taxable as a dividend from accumulated E&P, and $11,000 is tax-free as a return of capital.
• D)$5,000 is taxable as a dividend from current E&P, and $10,000 is tax-free as a return of capital.

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Definitions:

Fixed Expenses

Costs that do not fluctuate with changes in production level or sales volume.

Avoidable Expenses

Costs that can be eliminated if a certain decision is made, such as discontinuing a product line.

Financial Advantage

A benefit enjoyed by an entity that puts it in a stronger financial position, such as lower costs, greater revenues, or superior investment returns.

Avoidable Expenses

Costs that can be eliminated if a particular decision is made, such as discontinuing a product or service.