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

question 56

Multiple Choice

The Serenity Corporation distributes $200,000 in cash to its shareholder during 2017.Accumulated earnings and profits are $80,000 as of January 1,2017.Current earnings and profits for 2017 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.

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Definitions:

Profitable New Products

Goods or services newly introduced to the market that generate earnings exceeding their cost of production and marketing.

New Venture Creation

The process of designing, launching, and running a new business or startup.

Market Niche

A specialized segment of the market for a particular kind of product or service, characterized by specific customer needs and preferences that the business aims to fulfill.

First-Mover Advantage

Comes from being first to exploit a niche or enter a market.