Atlantic Corporation, a calendar-year taxpayer, has $120,000 of accumulated E&P deficit as of January 1. Atlantic's current E&P is $40,000. The corporation makes a $50,000 distribution to its shareholders. Shareholders have stock basis of $60,000. What is the amount of Atlantic's E&P deficit at the end of the year?
What will be an ideal response?
The $50,000 distribution to shareholders is a $40,000 taxable dividend (from current E&P) and a $10,000 return of capital to the shareholders (they have basis of at least this amount). The E&P deficit is not increased by the tax-free distribution; it continues to be $120,000.
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