Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000. On July 1, Blue distributes $250,000 to its sole shareholder, Sam, who has a basis in his stock of $52,500. As a result of the distribution, Sam has:
A) Dividend income of $225,000 and reduces his stock basis to $27,500.
B) Dividend income of $52,500 and reduces his stock basis to zero.
C) Dividend income of $225,000 and no adjustment to stock basis.
D) No dividend income, reduces his stock basis to zero, and has a capital gain of $250,000.
E) None of the above.

Question

Quizplus · Accepted Answer

The distribution is treated as a dividend to the extent of current E&P, which is $225,000. Sam's stock basis is not affected by the dividend income, so it remains $52,500.

Blue Corporation Has a Deficit in Accumulated E & P