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

question 52

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:

Elastic Demand

The case in which the price elasticity of demand is greater than 1.

Excise Tax

A tax levied on specific goods, services, or transactions, often with the aim of discouraging their use or raising revenue.

Elastic Supply

A scenario where the quantity supplied of a good or service changes significantly in response to changes in its price.

Deadweight Loss

A loss of economic efficiency that occurs when equilibrium for a good or a service is not achieved, leading to a misallocation of resources.