[evp490]

I am confused on what the correct recognition is. When no E&P reported, distributions are tax-free until basis and then a taxable Capital Gain for any excess. But then when E&P is reported, income received is a taxable dividend until basis, and then excess is non taxable return on stock.

Cash Distribution = 30,000

CEP: 20,000

AEP: 5,000

Shareholder Stock Basis= 10,000

I think the dividend should be 25,000 with a 5,000 return on basis, but how does the 10,000 shareholder basis come into play?

[tuanxn]

The dividend is $30,000 (cash distributed):

$25,000 of it is a taxable dividend broken down as $20,000 from Current E&P and $5,000 from Accumulated E&P

The remaining $5000 is non-taxable return on capital since the shareholder stock basis is $10,000. The remaining stockholder basis is $5000.

[evp490]

Ok, thanks I appreciate the help.

Now let's say instead of 10,000 basis, the shareholder's basis is 2,000. Since there is an excess 5,000 dividend, would only 2,000 be considered a return on basis with 3,000 being a taxable Capital Dividend?

[spatel15]

Capital Dividend is a weird term lol, but yea. It's technically the portion of the liquidating distribution treated/taxed as a capital gain. Capital Gains distributions have to do with RICs, which is probably not touched on but I can't be sure, I'm still on R3 =P

But the numbers and the concepts you're applying are accurate for the capital gains treatment of liquidating distributions, as well the portion that is return on capital.

[evp490]

Whoops haha yeah I meant capital gain, I make those switch ups all the time. But thank you.

[Author]

Replies