At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc.earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J. D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at thebeginning of the year is $10,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a capital gain?

Question

Quizplus · Accepted Answer

The distribution exceeds the accumulated adjustments account (AAA) and earnings and profits (E&P). J.D.'s share of the AAA is $25,000 (25% of $100,000), and his share of E&P is $15,000 (25% of $60,000). The total of these is $40,000, which is not taxable. The remaining $10,000 of the $50,000 distribution is taxable as a capital gain.

At the Beginning of the Year, Clampett, Inc