Hogg Corporation distributes $30,000 to its sole shareholder, Ima. At the time of the distribution, Hogg's E&P is $14,000 and Ima's basis in her stock is $10,000. Ima's gain from this transaction is a
A)$6,000 capital gain.
B)$14,000 capital gain.
C)$20,000 capital gain.
D)$30,000 capital gain.

Question

Quizplus · Accepted Answer

The distribution is first applied against the E&P of $14,000, which is treated as a dividend (ordinary income) to Ima. The remaining $16,000 ($30,000 - $14,000) reduces Ima's basis in the stock. Since Ima's basis is $10,000, after reducing the basis to zero, there is a $6,000 excess ($16,000 - $10,000), which is treated as a capital gain.

Hogg Corporation Distributes $30,000 to Its Sole Shareholder, Ima