Lincoln Corp., a calendar-year C corporation, made a nonliquidating cash distribution of $1.5 million to its shareholders with respect to its stock. At that time, Lincoln's current and accumulated earnings and profits totaled $825,000 and its total paid-in capital for tax purposes was $10 million. Lincoln had no corporate shareholders. Which of the following statements is (are) correct regarding Lincoln's cash distribution?
The distribution was taxable as $1.5 million in ordinary income to its shareholders.
The distribution reduced its shareholders' adjusted bases in Lincoln stock by $675,000.
A.
I only
B.
II only
C.
Both I and II
D.
Neither I nor II
Correct answer B. Can someone explain why? I thought D because $1.5 distribution would be considered Portfolio (dividend) income, so that gets rid of answer A.
And then the since it had both 825,000 as Current E&P and Acc E&P were 825,000 + 825,000 = 1.65M, which would mean that it all was dividend income and all taxable, therefore not reducing basis.