Non-liquidating Distributions

Corporation is a calendar year taxpayer. Pete owns one-third (100 shares) of Pink stock. His basis in the stock is $25,000. Cheryl owns two-thirds (200 shares) of Pink stock. Her basis in the stock is $40,000. On June 10 of the current year, Pink distributes $40,000 to Pete and $80,000 to Cheryl.

a. Determine the tax consequences (dividend income, return of capital, and/ or capital gain) of the cash distributions to Pete and Cheryl as well as the remaining stock basis if current E&P is $60,000 and accumulated E&P is $100,000.

b. Determine the tax consequences (dividend income, return of capital, and/ or capital gain) of the cash distributions to Pete and Cheryl if current E&P is $36,000 and accumulated E&P is $30,000.