IRC §301(c)(1) treats distributions as dividends to the extent of current and accumulated earnings and profits. Summit's total E&P is $25,000 ($15,000 current plus $10,000 accumulated), so $25,000 of the $50,000 distribution is dividend income. The remaining $25,000 is treated under §301(c)(2) as a return of capital, reducing the shareholder's stock basis from $30,000 to $5,000. Answer A incorrectly uses only current E&P. Answer C incorrectly treats the entire distribution as a dividend. Answer D incorrectly ignores E&P because of sufficient basis. The ordering rule requires dividend treatment to the extent of total E&P before basis recovery.

S corporation distributions without accumulated E&P are governed by IRC §1368(b), providing tax-free return of capital to the extent of stock basis. Xylem's $18,000 distribution first reduces the shareholder's stock basis from $5,000 to zero (tax-free), with the excess $13,000 treated as gain from the sale of property under §1368(b)(2), which is capital gain. Answer A incorrectly allows full basis offset when basis is only $5,000. Answer C incorrectly allows negative basis. Answer D incorrectly characterizes the income types. The correct treatment follows the statutory ordering: basis reduction first, then capital gain for any excess.

Under IRC §301, corporate distributions are taxed based on the corporation's earnings and profits (E&P), with distributions first treated as dividends to the extent of current and accumulated E&P. Yarrow has $65,000 in E&P and distributes $50,000 cash, which is less than the available E&P, making the entire distribution taxable as a dividend under §301(c)(1). The shareholder's $22,000 basis in the stock is irrelevant for determining dividend treatment, as basis only matters after E&P is exhausted. Option B incorrectly applies the ordering rules by treating part of the distribution as return of capital when E&P exceeds the distribution amount. Option C is incorrect because this is a non-redemptive distribution governed by §301, not a stock redemption under §302. Option D misunderstands the §301 ordering rules by prioritizing basis recovery over E&P. When analyzing corporate distributions, always compare the distribution amount to available E&P first—if E&P covers the entire distribution, it's all dividend income regardless of shareholder basis.

IRC §301 establishes the treatment of distributions in a specific order that affects stock basis. Timber's $60,000 distribution is first treated as a $45,000 dividend to the extent of E&P, which does not reduce stock basis. The remaining $15,000 is a return of capital under §301(c)(2), reducing the shareholder's basis from $8,000 to zero, with $7,000 treated as capital gain under §301(c)(3). Answer A incorrectly states dividends don't affect basis calculations. Answer C incorrectly allows negative basis. Answer D incorrectly increases basis for dividends. The shareholder's basis after the distribution is zero, as basis cannot go below zero for stock.

IRC §331 treats amounts received in complete liquidation as payment in exchange for stock, allowing capital gain or loss recognition. The shareholder receives securities worth $150,000 in exchange for stock with basis of $180,000, resulting in a $30,000 capital loss. The corporation's E&P of $60,000 is irrelevant in complete liquidations, as the entire transaction is treated as a stock sale. Answer B incorrectly applies dividend treatment in a liquidation. Answer C incorrectly denies loss recognition. Answer D incorrectly characterizes the loss as ordinary. Complete liquidations under §331 generate capital gain or loss based on the difference between amount realized and stock basis.

IRC §301 requires distributions to be treated as dividends only to the extent of current and accumulated E&P. With Juniper's E&P at zero, the entire $25,000 distribution is governed by §301(c)(2) and (c)(3). First, $18,000 reduces the shareholder's stock basis to zero as a tax-free return of capital under §301(c)(2). The remaining $7,000 exceeding basis is treated as gain from the sale of stock under §301(c)(3), which is capital gain. Answer A incorrectly assumes all distributions are dividends. Answer C incorrectly treats the entire amount as capital gain. Answer D reverses the correct ordering. The statutory scheme prioritizes E&P, then basis reduction, then gain recognition.

S corporation distributions without accumulated E&P are governed by IRC §1368(b), which provides tax-free treatment to the extent of stock basis. Harbor's $30,000 distribution to a shareholder with $38,000 stock basis is entirely a tax-free return of capital, reducing the shareholder's basis from $38,000 to $8,000. No gain is recognized because the distribution does not exceed basis. Answer A incorrectly applies C corporation dividend rules requiring E&P. Answer B incorrectly characterizes all S corporation distributions as capital gain. Answer D incorrectly treats S corporation distributions as wages. The key principle is that S corporation distributions without E&P reduce basis first before generating gain.

IRC §311(a) provides the general rule that a corporation recognizes no gain or loss on the distribution of property to shareholders with respect to its stock. However, §311(b) creates an exception requiring gain recognition on appreciated property. Since Kite's property has declined in value (FMV $65,000 < basis $80,000), the general rule of §311(a) applies and no loss is recognized. Answer B incorrectly allows loss recognition. Answer C incorrectly calculates a gain on depreciated property. Answer D incorrectly limits recognition to E&P. The policy prevents corporations from selectively recognizing losses through distributions while retaining appreciated property.

IRC §302 governs stock redemptions and establishes tests to determine whether a redemption qualifies for sale or exchange treatment versus dividend treatment under §301. The redemption of 10% of the shareholder's stock must be analyzed under §302(b) tests, including substantially disproportionate redemption and not essentially equivalent to a dividend. Answer A (§1368) applies to S corporations, not C corporations. Answer C (§331) applies to complete liquidations. Answer D (§721) applies to partnership contributions. Since the shareholder still owns 90% after redemption, careful analysis under §302 is required to determine if exchange treatment is available.

Under IRC §301(d), a shareholder's basis in property received in a corporate distribution equals the property's fair market value on the distribution date. The shareholder receives property with FMV of $140,000, which becomes the shareholder's basis regardless of the corporation's basis ($90,000) or the shareholder's stock basis ($60,000). This FMV basis rule ensures proper measurement of future gain or loss when the shareholder disposes of the property. Answer A incorrectly uses the corporation's basis. Answer B incorrectly limits basis to stock basis. Answer D incorrectly limits basis to E&P. The distribution itself is taxed under §301(c) based on E&P and stock basis, but the property basis is always FMV.