At the beginning of the year, Clampett, Inc., had $100,000 in its AAA and $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 percent of Clampett, Inc., his basis in Clampett, Inc., at the beginning of the year is $30,000, and his share of the distribution was $50,000.How much, if any, of the distribution is taxable as a dividend?

Question

Quizplus · Accepted Answer

First, we need to calculate the amount of the distribution that is considered a taxable dividend. To do this, we must first reduce the distribution by the amount of J.D.'s share of the AAA balance at the start of the year.

J.D.'s share of the AAA balance = $100,000 x 25% = $25,000 
Amount of distribution subject to taxation = $50,000 - $25,000 = $25,000

Next, we need to determine the amount of the distribution that is a tax-free return of capital. To do this, we must reduce J.D.'s basis in Clampett, Inc. by the amount of the tax-free distribution.

J.D.'s basis in Clampett, Inc. = $30,000 
Tax-free distribution = $25,000 
New basis in Clampett, Inc. = $30,000 - $25,000 = $5,000

Since J.D.'s share of the distribution ($50,000) exceeds the amount subject to taxation ($25,000), the remaining $25,000 is considered a tax-free return of capital.

Therefore, the taxable portion of J.D.'s distribution is $25,000 and the non-taxable portion is $25,000. J.D. will need to report the $25,000 as a dividend on his tax return. The correct answer is choice C.

At the Beginning of the Year, Clampett, Inc