Elvis owns all of the stock of Shadow Corporation.The accumulated earnings and profits of Shadow Corporation at the end of the year are a deficit of $110,000.The current earnings and profits are $0.Elvis' basis for his stock is $295,000.He receives a distribution of $300,000 on the last day of the tax year.How much gain should Elvis report?
A)$0.
B)$5,000.
C)$295,000.
D)$300,000.
E)None of the above.

Question

Quizplus · Accepted Answer

When a shareholder receives a distribution from a corporation, the distribution is first applied to reduce the shareholder's basis in the stock. In this case, Elvis' basis is $295,000 and he received a distribution of $300,000, therefore $295,000 of the distribution will reduce his basis to $0. The remaining $5,000 of the distribution will be treated as gain to Elvis, even though Shadow Corporation had an accumulated earnings and profits deficit. Therefore, Elvis should report a gain of $5,000 on his tax return.

Elvis Owns All of the Stock of Shadow Corporation