Problem
Lilly, Grace, and Christina are 20%, 20%, and 60% owners respectively of Widget Corp. Widget Corp makes a distribution on April 1 of $10,000 pro rata to the shareholders and another distribution on June 1 of $30,000 pro rata to the shareholders. Lily's basis in her shares is $10,000. Grace's basis in her shares is zero. Christina's basis in her shares is $1,000. Widget Corp has $20,000 current E&P at the end of the year and $10,000 of accumulated E&P. Explain how the distributions are taxed to Lily, Grace, and Christina.