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

question 64

Multiple Choice

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.

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Definitions:

Generate And Exploit

A strategy that involves creating new ideas, products, or processes and making use of them to achieve competitive advantage or market success.

Minimize Or Shed

Strategies employed to reduce, remove, or delegate non-core business activities or assets to focus on primary objectives.

Opportunity-Seeking Processes

The methodologies or approaches used by individuals or organizations to identify and exploit potential opportunities for growth or improvement.

Ownership Mind-Set

A way of thinking characterized by taking responsibility, showing initiative, and actively managing one's assets or area of control.