During the year, Chelsie, the sole shareholder of a calendar year S corporation, received a distribution from the S-corp of $33,000 in cash. At the end of last year, her stock basis was $9,000. The corporation earned $11,000 ordinary income during the year. The corporation has no accumulated E & P, from prior years, but does have a beginning of the year balance in AAA of $3,000. How is the distribution to Chelsie taxed on her federal income tax return?
Distribution is $33,000
Basis in stock before distribution = $9,000 beginning + $11,000 income = $20,000
Distribution is taxable as dividend to the extent of $3,000 AAA balance.
Distribution is not taxable to the extent of $20,000 basis in stock.
Remaining distribution = $33,000 - $3,000 - $20,000 = $10,000 is taxable as capital gain.
Thus, total distribution is taxable as:
$20,000 non-taxable return of basis in stock
$10,000 long-term capital gain
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