The Serenity Corporation Distributes $200,000 in Cash to Its Shareholder

Multiple Choice

The Serenity Corporation distributes $200,000 in cash to its shareholder during 2018. Accumulated earnings and profits are $80,000 as of January 1, 2018. Current earnings and profits for 2018 are $84,000. Jonas, the sole shareholder of Serenity Corporation, has a basis of $48,000 in his stock. What is the tax effect of the distribution for Jonas?

A) Jonas will recognize ordinary income of $164,000 and a capital gain of $36,000.
B) Jonas will recognize ordinary income of $84,000, capital gain of $80,000 and a tax-free recovery of capital of $36,000.
C) Jonas will recognize ordinary income of $164,000 and a tax-free return of capital of $36,000.
D) Jonas will recognize ordinary income of $164,000 and a capital loss of $12,000.
E) Jonas will recognize ordinary income of $200,000 and a capital loss of $12,000.