In its first year of operation as an S Corp, the corporation had an ordinary business income of $8,000. It also has a tax-exempt income of $1,000. The corporation had $2,000 of C Corp earnings and profits accumulated prior to the S Corp election. The shareholder basis in the shares at the beginning of that first S Corp year was $3,000. At the end of that year, The corporation distributes $8,500 to its sole shareholder. How is the distribution treated for tax purposes? Include in your answer the basis of the shares in the S Corp at the beginning of the year. following the year of the distribution.
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