The Polaris S Corporation Has Operating Income of $50,000

question 51

Multiple Choice

The Polaris S Corporation has operating income of $50,000. Andrew is the sole shareholder of the corporation that has had the S election in effect since its inception. At the beginning of the current year, Andrew's basis in his S corporation stock is $2,000. During the year Andrew receives cash distributions totaling $55,000. How much income must Andrew recognize for the current tax year?

• A)$50,000 ordinary income; $55,000 dividend income.
• B)$50,000 ordinary income.
• C)$50,000 ordinary income; $3,000 capital gain.
• D)$55,000 dividend income; $3,000 capital gain.
• E)$55,000 dividend income.

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Definitions:

Redeemed

Refers to the process of exchanging a financial instrument, such as a bond or coupon, for its cash value or for another specified benefit.

Specified Price

The agreed-upon price for goods or services stipulated in a contract.

Shareholder's Derivative Suit

A legal action initiated by a shareholder on behalf of the corporation against a third party, often the corporation's executives or directors, for mismanagement or fraud.

Corporate Directors

Individuals elected by shareholders to oversee the management of a corporation and ensure that it is being run in accordance with their interests.