Longhorn Company Reports Current E&P of $100,000 in Year 1

question 108

Multiple Choice

Longhorn Company reports current E&P of $100,000 in year 1 and accumulated E&P at the beginning of the year of negative $200,000. Longhorn distributed $300,000 to its sole shareholder on January 1, year 1. The shareholder's tax basis in his Longhorn stock is $100,000. How is the distribution treated by the shareholder in year 1?

• A) $300,000 dividend
• B) $100,000 dividend, $100,000 tax-free return of basis, and $100,000 capital gain
• C) $100,000 dividend and $200,000 tax-free return of basis
• D) $0 dividend, $100,000 tax-free return of basis, and $200,000 capital gain

---

Definitions:

Carpals

The eight small bones that make up the wrist that connects the hand to the forearm.

Femur

The thigh bone, which is the longest, strongest, and heaviest bone in the human body, extending from the hip to the knee.

Fibula

A long, thin bone located in the lower leg, lateral to the tibia, playing a key role in stabilizing the ankle and supporting lower leg muscles.

Tarsals

A group of seven bones in the foot situated between the lower leg bones and the metatarsals, contributing to foot's structure and movement.