If a shareholder has zero basis in stock and receives a distribution, what is the effect on the basis?

In the context of corporate distributions to shareholders, when a shareholder receives a distribution and has zero basis in their stock, the basis cannot go below zero. This principle is rooted in tax law, which stipulates that a shareholder's stock basis acts as a measure of their investment in the company. When a distribution is made, it is generally considered to reduce the basis in the stock rather than create a negative basis.

If the shareholder has a zero basis, receiving a distribution will not further reduce that basis into negative territory; instead, the basis will remain at zero after the distribution. Any amount received in excess of the stock basis may be treated as capital gain, but it does not impact the basis negatively.

Therefore, the understanding of basis maintenance in stock ownership is foundational in determining the tax consequences of distributions and ensures that shareholders' losses due to distributions do not exceed their initial investment in the company. This principle is crucial for accurate tax reporting, as a negative basis could create complex tax liabilities that the law aims to avoid.