JJJ Company has earnings and profits of $30,000.The corporation distributes property with a basis of $40,000 and a FMV of $35,000 to Jill,its sole shareholder.Her basis in the stock is $30,000.Which of the following statements is correct?

Question

Quizplus · Accepted Answer

The distribution of property with a basis higher than its FMV results in a loss to the corporation of $5,000. However, since Jill's basis in the stock is only $30,000, she can only receive a nontaxable return of capital of $30,000. The remaining $5,000 is treated as a capital loss to Jill, which she can use to offset other capital gains or deduct up to $3,000 against ordinary income. Therefore, option A is correct. Option B is incorrect because a distribution of property is not considered a dividend. Option C is also incorrect because although the corporation incurs a loss, it does not directly affect the tax treatment of the distribution to Jill.

JJJ Company Has Earnings and Profits of $30,000