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
A)$4,000.
B)$10,000.
C)$25,000.
D)$31,000.

Question

Quizplus · Accepted Answer

The distribution to Sally is first applied against Dixie's E&P, which is $25,000, reducing the distribution to $6,000 ($31,000 - $25,000) that is considered a return of capital. This reduces Sally's basis in her Dixie stock by the same amount, from $10,000 to $4,000 ($10,000 - $6,000).

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