Question

At the end of the year, before distributions, Bombay (an S corporation) has an accumulated adjustments...

At the end of the year, before distributions, Bombay (an S corporation) has an accumulated adjustments account balance of $15,000 and accumulated E&P of $20,000 from a previous year as a C corporation. During the year, Nicolette (a 40 percent shareholder) received a $20,000 distribution (the remaining shareholders received $30,000 in distributions). (Assume her stock basis is $40,000 after considering her share of Bombay’s income for the year but before considering the effects of the distribution.)

Required:

  1. What is the amount and character of gain Nicolette must recognize from the distribution?
  2. What is her basis in her Bombay stock at the end of the year?
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