Emma is the sole shareholder in Pacific Corporation and has owned the stock for five years. The basis in her stock is $50,000. Pacific distributes $35,000 to Emma. Accumulated earnings and profits at the beginning of the year equal $25,000 and current earnings and profits equal $5,000.
Required:
a. What are the tax consequences of this information?
b. What are the tax consequences of this information if, instead of distributing $35,000 to Emma, Pacific distributes $100,000 to Emma?
a. Emma reports $30,000 of taxable dividend income and a nontaxable return of capital equal to $5,000. Distributions from C corporations are taxable as dividends to the extent of current or accumulated earnings and profits. In addition, Emma must reduce her basis in the stock by $5,000.
b. Emma reports $30,000 of taxable dividend income, a nontaxable return of capital of $50,000, and capital gain of $20,000.
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