Zebra Corporation has always been an S corporation and is 100% owned by Paul. Paul has a basis of $40,000 in his Zebra stock at the beginning of the year. During the year, Zebra has an ordinary loss of $20,000 and a long-term capital gain of $10,000. In addition, Zebra Corporation distributed $55,000 in cash to Paul on December 1. Will the distribution cause Paul to recognize a gain? If so, what are its amount and character? Solution The answer of the question is $5000 gain recognise by the paul as a long term capital Investment amount = $40000 Add: Long term capital gain= $10000 Less: Distributed amount= (55000) Distributions cannot reduce basis below zero. The $5,000 excess distribution is a long-term capital gain .