Orange Corporation has a deficit in accumulated E & P of $600,000 and has current E & P of $450,000.On July 1, Orange distributes $500,000 to its sole shareholder, Morris, who has a basis in his stock of $105,000.As a result of the distribution, Morris has:
A)Dividend income of $450,000 and reduces his stock basis to $55,000.
B)Dividend income of $105,000 and reduces his stock basis to zero.
C)Dividend income of $450,000 and no adjustment to stock basis.
D)No dividend income, reduces his stock basis to zero, and has a capital gain of $500,000.
E)None of the above.

Question

Quizplus · Accepted Answer

The distribution is a dividend to the extent of current E&P, which is $450,000. The remaining $50,000 is a return of capital, which reduces Morris's stock basis to $55,000 ($105,000 - $50,000).

Orange Corporation Has a Deficit in Accumulated E & P