Reg C Corp Distribution Question

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  • #3198770

    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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  • #3199115
    Mike J

    From what I remember there are ordering rules for non-liquidating distribution.
    1) Cash distribution amount received is a Taxable dividend up to Earnings and Profit
    2) Remaining amount is nontaxable return of capital up to shareholder's basis
    3) Remaining about is Taxable capital gain.

    So based on this, it cannot be A (entire distribution is not taxable).

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