This is a corporate taxation question. I do not understand why renee's distribution is treated as a 56000 dividend and a 4000 reduction in stock basis and why chad's distribtution is 60000 dividend and a 60000 reduction in a stock basis. The answer and explanation is given so please EXPLAIN my question. DO NOT SIMPLY GIVE ME THE ANSWER

58. Renee, the sole shareholder of Indigo C at orporation, sold her stock to Chad on July I for $180,000. Renee's stock basis ndigo made a $60,000 cash distribution to Renee immediately before the sale, while Chad received a $120.000 cash distribution from Indigo on November 1. As of the beginning of the current year ndigo had $26,000 in accumulated E &P, whil following statements is correct? 20000 in accumulated E & P, while current E&P(before distributions) was $90,000. Which of the Renee recognizes a $60,000 gain on the sale of the stock. a. b. Renee recognizes a $64,000 gain on the sale of the stock. c. Chad recognizes dividend income of $120,000. d. Chad recognizes dividend income of $30,000. e. None of the above. ANSWER RATIONALE The $90,000 in current E & P is allocated on a pro rata basis to the two distributions made during the year; thus, S30.000 of current E & P is allocated to Renee and S60.000 is/ N allocated to Chad. Accumulated E & P is a located in chronological order, so that all 26,000 is allocated to Renee. Therefore, the distribution to Renee is treated as a $56,000 dividend ,,9 60030 20 o3JJ and a $4,000 reduction in stock basis. Chad's distribution consists of a $60,000 dividend and a $60,000 reduction in stock basis. Since Renee sells her stock for $180,000 and her basis 220 19 r o)mediately after the distribution is $116,000 ($120,000 original basis-34,000 recovery of a2oo capital), she has a $64 000 gain on sale. 26