Elvis owns all of the stock of Shadow Corporation.The accumulated earnings and profits of Shadow Corporation at the end of the year are a deficit of $12,000.The current earnings and profits are $25,000.Elvis' basis for his stock is $290,000.He receives a distribution of $340,000 on the last day of the tax year.How much dividend income and/or capital gain should Elvis report?
A)$0.
B)Dividend income of $13,000 and capital gain of $37,000.
C)Dividend income of $25,000 and capital gain of $25,000.
D)Dividend income of $0 and capital gain of $50,000.
E)None of the above.

Question

Quizplus · Accepted Answer

The distribution is first applied to current earnings and profits, resulting in $25,000 of dividend income. The remaining $315,000 reduces Elvis' stock basis of $290,000, resulting in a $25,000 capital gain.

Elvis Owns All of the Stock of Shadow Corporation