Orange Corporation has a deficit in accumulated E & P of $600,000 and has curren

Question

Orange Corporation has a deficit in accumulated E & P of $600,000 and has current E & P of $450,000. At year-end, Orange distributes $500,000 to its sole shareholder, Morris, who has a basis in his stock of $105,000. As a result of the distribution, Morris has:

A) Dividend income of $450,000 and reduces his stock basis to $55,000.
B) Dividend income of $105,000 and reduces his stock basis to zero.
C) Dividend income of $450,000 and no adjustment to stock basis.
D) No dividend income, reduces his stock basis to zero, and has a capital gain of $500,000.
E) None of the above.

Explanation / Answer

B)Dividend income of $105,000 and reduces his stock basis to zero

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