Crossroads Corporation distributes $60,000 to its sole shareholder Harley. Crossroads has earnings and profits of $55,000 and Harley's basis in her stock is $20,000. After the distribution, Harley's basis is

Question

Quizplus · Accepted Answer

When a corporation distributes earnings and profits to a shareholder, the distribution is treated as a dividend to the extent of the corporation's earnings and profits. In this case, since Crossroads Corporation has earnings and profits of $55,000, $55,000 of the $60,000 distribution is treated as a dividend to Harley. The remaining $5,000 of the distribution is treated as a return of Harley's basis in her stock. Therefore, Harley's basis in her stock is reduced from $20,000 to $15,000 ($20,000 - $5,000).

Crossroads Corporation Distributes $60,000 to Its Sole Shareholder Harley