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Lincoln Corp., a calendar-year C corporation, made a nonliquidating cash distribution of $1,500,000 to its shareholders with respect to its stock. At that time, Lincoln’s current and accumulated earnings and profits totaled $825,000 and its total paid in capital for tax purposes was $10,000,000. Lincoln had no corporate shareholders. Which of the following statements is(are) correct regarding Lincoln’s cash distribution?
I. The distribution was taxable as $1,500,000 in ordinary income to its shareholders.
II. The distribution reduced its shareholders’ adjusted bases in Lincoln stock by $675,000.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
The correct answer is B, but I am wondering why the the entire 1,500,000 distribution would not reduce the adjusted basis in Lincoln stock? Can anyone help with this! Thank you!
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