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Unformatted text preview: $675,000.
d. I only.
Both I and II.
Neither I nor II. CPA-02257
Choice "b" is correct. The distribution reduced the shareholders' adjusted bases in Lincoln Corporation
Stock by $675,000.
Rule: Non-liquidating cash distributions (deemed dividends) are ordinary dividends to the shareholder to
the extent of current and accumulated earnings and profits (retained earnings). Any portion paid in
excess of current and accumulated earnings and profits is considered a return of capital to the
shareholder, to the extent of the shareholder's basis (anything in excess of basis, which includes paid-incapital and common stock, is capital gain to the shareholder).
Note: The distinction of whether the shareholders were corporate shareholders or individuals is a
distractor for purposes of this question. It would make a difference for taxation of the dividends due to the
corporate dividends received deduction, but this is not asked in the question.
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Becker CPA Review, PassMaster Questions
Lecture: Regulation 3 Reduction in...
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