The Serenity Corporation distributes $200,000 in cash to its shareholder during 2013.Accumulated earnings and profits are $80,000 as of January 1,2013.Current earnings and profits for 2013 are $84,000.Jonas,the sole shareholder of Serenity Corporation,has a basis of $48,000 in his stock.What is the tax effect of the distribution for Jonas?
A)Jonas will recognize ordinary income of $164,000 and a capital gain of $36,000.
B)Jonas will recognize ordinary income of $84,000, capital gain of $80,000 and a tax-free recovery of capital of $36,000.
C)Jonas will recognize ordinary income of $164,000 and a tax-free return of capital of $36,000.
D)Jonas will recognize ordinary income of $164,000 and a capital loss of $12,000.
E)Jonas will recognize ordinary income of $200,000 and a capital loss of $12,000.

Question

Quizplus · Accepted Answer

The tax effect of the distribution for Jonas is that he will recognize ordinary income of $164,000, which is the total distribution of $200,000 minus the current earnings and profits of $84,000. Additionally, he will receive a tax-free return of capital of $36,000, which is the amount that exceeds the accumulated earnings and profits of $80,000. Because Jonas's basis in his stock is $48,000, he will not recognize any capital gains or losses. Therefore, option C is the correct choice.

The Serenity Corporation Distributes $200,000 in Cash to Its Shareholder