Question

Indigo, Inc., a calendar year S corporation, has no AEP. During the year, Amir, an individual shareholder of the corporation, receives a cash distribution of $18,500 from Indigo. Amir's basis in his stock is $15,000. In this case:

Answer 1

Amir receives $15,000 tax free.

Refer below.

Step-by-step explanation:

Indigo, Inc., a calendar year S corporation, has no AEP. During the year, Amir, an individual shareholder of the corporation, receives a cash distribution of $18,500 from Indigo. Amir's basis in his stock is $15,000. In this case:

Amir receives $15,000 tax free.

Answer 2

Amir's basis is $0, so he/she is no longer a shareholder, and must pay taxes only for the $3,500 capital gain.

Step-by-step explanation:

Accumulated earnings and profits = $0, so it should not distribute dividends. What probably happened is that Indigo is repurchasing Amir's stocks:

Amir's gain/loss on the distribution = $18,500 cash - $15,000 basis = $3,500 gain

So now Amir's basis is $0, so he/she is no longer a shareholder, and must pay taxes only for the $3,500 capital gain.