Dixie Corporation distributes $31,000 to its sole shareholder, Sally. At the time of the distribution, Dixie's E&P is $25,000 and Sally's basis in her Dixie stock is $10,000. Sally's basis in her Dixie stock after the distribution is

Question

Quizplus · Accepted Answer

When a corporation makes a distribution to its shareholder, the shareholder's basis in their stock is reduced by the amount of the distribution. However, the basis cannot go below zero.

In this case, Dixie Corporation distributed $31,000 to Sally, which is more than the $25,000 of E&P that Dixie has. This means that $6,000 of the distribution is treated as a return of Sally's basis in her Dixie stock.

Sally's basis in her Dixie stock after the distribution would be the original $10,000 basis minus the $6,000 return of basis, for a new basis of $4,000. Therefore, the correct answer is C.

Dixie Corporation Distributes $31,000 to Its Sole Shareholder, Sally