Question

ABC Corporation distributed 50,000 cash to its only shareholder. It's a normal distribution, not a liquidating distribution or redemption. The shareholder's stock basis is 10,000. The corporation's E&P is 35,000. Determine the shareholder's taxable income (and character) and the shareholder's stock basis after the distribution.

Answer 1

Gain : Distribution amount - stock basis

       = 50000 - 10000

       = 40000

Up to the amount of E& P available gain is taxable as ordinary gain/income and excess amount will be taxable as capital gain.

$ 35000 will be taxable as ordinary income and $ 5000 will be taxable as capital gain           [40000-35000]

Stockholders basis after distribution = 10000-10000 distributed= 0