Clampett, Inc. (an S corporation) previously operated as a C corporation. Under general rules, distributions from Clampett, Inc. are deemed to be paid in the following order:

Question

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Under the rules for S corporations, distributions are first deemed to be paid from the accumulated adjustment account (AAA), followed by any previously taxed income (PTI) or earnings and profits (E&P) from the period when the corporation was a C corporation. Any remaining distributions are then applied to reduce the shareholder's stock basis. Therefore, the correct order is AAA account, prior C corporation E&P, and finally, shareholder's remaining stock basis. Choice B reflects this order.