A is corrent. The amount of a distribution is the amount of cash plus the fair value of other property distributed. Therefore, Easy Corporation’s total distribution to shareholders is $35,000 ($10,000 cash + $25,000 FMV of the property). This distribution is treated as a dividend to the shareholders to the extent of the corporation’s earnings and profits ($22,000), while the remaining $13,000 ($35,000 — $22,000) is considered a nontaxable return of stock basis and as such results in a reduction of the shareholders’ stock basis. Thus, the shareholders’ stock basis at the end of 2012 is $63,000 ($76,000 — $13,000).
B is incorrect. The distribution results in a dividend of $22,000 with the remainder treated as a return of stock basis.
C is incorrect. The distribution results in a dividend of $22,000 with the remainder treated as a return of stock basis.
D is incorrect. The distribution results in a dividend of $22,000 with the remainder treated as a return of stock basis.
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