Joshua owns 100% of Steeler Corporation's stock. Joshua's basis in the stock is $8,000. Steeler Corporation has E&P of $40,000. If Steeler Corporation redeems 60% of Joshua's stock for $50,000, Joshua must report dividend income of
A)$0.
B)$8,000.
C)$40,000.
D)$50,000.

Question

Quizplus · Accepted Answer

Joshua must report dividend income of $40,000 because the redemption of stock is essentially treated as a distribution from the corporation to the shareholder to the extent of the corporation's Earnings and Profits (E&P). Since Steeler Corporation has E&P of $40,000, and the redemption does not qualify as a sale or exchange, the entire amount up to the E&P is considered dividend income.

Joshua Owns 100% of Steeler Corporation's Stock