Question

S corporation had been a C corporation ( E & P $20,000). The AAA account for the sole shareholder is $20,000. Shareholder’s basis in corporation is $20,000. Corporation distributes cash of $50,000. Explain the tax effect on the shareholder

Answer 1

It happens that a corporation will distribute to its shareholders at frequent intervals some amount as and when the corporation is in profits. This is not a dividend this is a distribution.

When such distribution is made, as long as the amount is within the shareholders basis in the corporation, it is not taxable in the hands of shareholder. But when the distribution made is in excess of such basis it will be taxable in the hands of shareholders as a long term capital gain.