John Adams is the sole shareholder and receives $30,000 cash distribution from his C corporation. The corporation's E&P is $25,000 and John's tax basis in his stock is $10,000. How much income (and what character) does John realize and recognize?

Taxable dividend $25,000

Nontaxable return of capital $5,000

His stock tax basis is now $5,000

Now, if this were a redemption of stock (the corporation buys back 60% of John's stock) it would be treated similarly because John's ownership of stock did not change (100% ownership of outstanding stock before and after the redemption since he's the sole shareholder). If instead, John was only 50% owner and redeemed 60% of his stock, it would be treated as a sale, $24,000 capital gain, because his ownership went from 50% to 20% (substantial reduction in ownership). The remaining basis is $4,000.

Answer rating: 100% (QA)

1 Dividends are taxable 2 John Adams realizes and recognizes 25000 in ta... View the full answer