Adam owns 100% of Banana Company and has a basis of $60,000 in its stock.The company has earnings and profits of $54,000 and distributes a cash dividend to Adam of $72,000.Adam has a:

Question

Quizplus · Accepted Answer

Since the company has earnings and profits of $54,000 and the distribution is $72,000, the entire distribution is treated as a dividend to Adam. However, since Adam's basis in the stock is only $60,000, he will have a nontaxable distribution of $18,000 ($60,000 basis - $72,000 distribution). Therefore, choice C is the correct answer.

Adam Owns 100% of Banana Company and Has a Basis