In the beginning of 2022, LGL, Inc., an S-corporation, has the following balances: accumulated adjustments account (AAA) of $10,000, accumulated earnings and profits (AEP) of $8,000, and basis of $40,000. During 2022, LGL has an operating loss of $(2,000) and a long-term capital gain of $6,000. LGL, Inc. distributes $20,000 of cash to its Hortense, the sole shareholder, who is in the 37% tax bracket. a). What are the tax consequences to Hortense as a result of this distribution?

b). What are the ending balances in AAA and AEP? What is Hortense's ending stock basis?

c). You are meeting with Hortense to discuss the tax results for her LGL in 2022. Hortense says, "Well, I don't fully understand this S corp stuff, but I do know that the $20,000 cash I received as a distribution is not subject to tax." How would you respond to Hortense?