Bryant purchased 200 shares of DEF stock for 2500 in 2014 DE

Bryant purchased 200 shares of DEF stock for $2,500 in 2014. DEF had no earnings or profits in 2015 or 2016. Bryant received a $1500 return of capital in 2015 and a $1500 return of capital in 2016. What should be reported on his 2016 tax return?

a) $500 capital gain

b) $500 dividend income

c) $1000 capital gain

d) $1000 dividend income

Solution

Answer : c) $1000 capital gain

=> The distribution to the current shareholders out of the accumulated profits under Retained Earnings prior to the year in which the company had no earnings or profits is treated as Return on capital which is a qualified one, so it is reported as Capital gain in the Tax return. Moreover, the dividend paid out of the income of the year is treated as Dividend income. Thus, the answer is (c) $1000 capital gain