Problem
At the end of the year, before distributions, Bombay (an S corporation) has an accumulated adjustments account balance of $16,200 and accumulated E&P of $21,500 from a previous year as a C corporation. During the year, Nicolette (a 40 percent shareholder) received a $21,500 distribution (the remaining shareholders received $32,250 in distributions). (Assume her stock basis is $43,000 after considering her share of Bombay's income for the year but before considering the effects of the distribution.)
Task
• What are the amount and character of income or gain Nicolette must recognize from the distribution?
• What is her basis in her Bombay stock at the end of the year?