In 2015, Beige Corporation made a cash distribution to its shareholders, one of whom was Steve Jordan.
At that time, the parties involved believed the distribution was a return of capital because Beige had no
E & P. Accordingly, none of the shareholders reported dividend income. In Steve’s case, he reduced the
$200,000 original basis of his stock investment by $40,000, his share of the distribution. In 2021, Steve
discovered that E & P had been incorrectly computed. The 2015 distribution was fully covered by E & P
and should not have been treated as a return of capital.
In 2021, Steve sells his stock in Beige Corporation for $350,000. He plans to report a gain of $150,000
[$350,000 (selling price) – $200,000 (original basis)] on the sale. Although Steve realizes he should have
recognized dividend income of $40,000 for 2015, the statute of limitations has made this a closed year.
Comment on Steve’s situation. Steve has asked you to prepare his tax return for 2021. Should you
accept this engagement?