Hello aj485:
With respect, the (well-taken) point your raise in your comment is a separate question, although related, to what the original poster asked. But you do bring up an excellent issue, and it is certainly worthy of some additional discussion.
The situation you describe actually has a name, and is called a "nondividend distribution in excess of basis." It rarely, if ever, happens with a publicly-traded C-corporation, but can certainly occur in a privately-held S-corporation, or sometimes even with Publicly-traded Master Limited Partnerships (MLPs), especially where the owner has held his or her shares / units a long time, and may have a low basis at the time of a non-dividend distribution (a.k.a. return of capital).
Let's take your numbers to illustrate an actual example. You are indeed correct that when a shareholder experiences a distribution in excess of their basis, they have to recognize (and report) a capital gain on their personal tax return in that same year, sufficient to "restore" their basis back to zero.
Thus, in 2016, if a shareholder owns a stock with a basis of $20, and receives a nondividend distribution of $30, this would otherwise result in a basis of -$10. However, this cannot be allowed to exist, according to the tax law. Thus, the shareholder has to recognize (that year) a capital gain of $10, which will "restore" their basis back to $0 (the lowest number allowable). The nature of the capital gain, whether that is long-term or short-term, will depend on the holding period (longer than one year or shorter than one year) of the underlying stock.
As to where (or how) you would report this in TurboTax, the answer to that is easy. You would just enter it in the stock/investments sales section of the program, the same as you would with any other capital asset sale, which gets reported on a Form 1040, Schedule D (capital gains or losses) . . . after it first "flows through" Form 8949.
Furthermore, you would want to mechanically enter this item as a discrete stock "sale," with a net proceeds (sale price) of $10, and a cost basis of $0 (or $0.01, if you need to enter a positive basis number of some kind to avoid a program error). It would furthermore be a "non-covered" security; and the long-term / short-term nature of the "sale" would, again, depend on your holding period.
Hopefully this answer is understandable, and thanks again for asking this good question.
