Houghton Company reports a deficit in current E&P of ($500,000) and a deficit in accumulated E&P of ($800,000). Houghton distributed $100,000 to its sole shareholder, Blossom Applegate, on December 31, 20X3. Blossom's tax basis in her Houghton stock is $50,000. What is the tax treatment of the distribution to Blossom, and what is her tax basis in Houghton stock after the distribution?
What will be an ideal response?
$0 dividend to Blossom, $50,000 tax-free return of capital, and $50,000 capital gain. Her tax basis in Houghton stock is $0.
No part of the distribution is treated as a dividend because both current and accumulated E&P is negative. The first $50,000 of the distribution is a tax-free return of capital, and the remaining $50,000 is treated as gain from sale of stock. Her tax basis in Houghton stock is $0.
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