Reference no: EM133149124

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?

Prepare your response as if it is for a partner in your firm.

Reference the AICPA Statements on Standards for Tax Services.