S Corporations Exam Question 11 of 50 Select the best answer. In 20X1, Cantell,

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S Corporations Exam Question 11 of 50 Select the best answer. In 20X1, Cantell, Inc., has $6,000 of the accumulated adjustments account and $10,000 of previousty taxed income. Carol's basis in 100% of the corporate stock is $20,000. During the year, Carol receives a cash distribution of $45,000. What is the taxable nature of the distribution? O A. Dividend income: $45,000 O B. Ordinary income: $45,000 C. Tax-free return of capital: $20,000; Capital gain: $25,000 O D. Tax-free return of capital: $20,000; Dividend income: $25,000 Submit Answers 2% Complete Exam, Question Q 11

Explanation / Answer

DISTRIBUTIONS ARE ASSUMED TO BE MADE FROM AAA (TAX FREE); PREVIOUSLY TAXED INCOME (PTI) (TAX FREE), AEP (DIVIDEND), AND THEN THE OTHER ADJUSTMENTS ACCOUNT (OAA) (TAX FREE AS THESE ARE TAX-EXEMPT ITEMS). OTHERWISE, DISTRIBUTIONS ARE A TAX-FREE RETURN OF CAPITAL (WHERE AMOUNTS IN EXCESS OF BASIS ARE CONSIDERED CAP GAIN)

Answer is therefore D

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