At the beginning of the year, Amber Corporation (a calendar year taxpayer) has E & P of $15,000. The corporation generates no additional E & P during the year. On July 1, the corporation distributes $20,000 to its sole shareholder, Bonnie, whose stock basis is $4,000.?

In this situation, Bonnie recognizes dividend income of $15,000 (the amount of E & P distributed). Of the remaining $5,000 distributed, $4,000 reduces her stock basis to zero, and Bonnie recognizes a taxable gain of $1,000.