At the beginning of the year, Clampett, Incorporated, had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Incorporated, earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25percent of Clampett, Incorporated, his basis in Clampett, Incorporated, at the beginning of the year is $30,000, and his share of the distribution was $50,000. What is J.D.'s basis in the Clampett, Incorporated, stock after these transactions?
A)$0
B)$5,000
C)$12,500
D)$15,000
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

J.D.'s basis is reduced by his share of the distribution that exceeds the earnings and profits. The total distribution is $200,000, and the earnings and profits are $110,000 ($60,000 prior + $50,000 current). The excess distribution is $90,000, and J.D.'s share is 25% of that, which is $22,500. His initial basis of $30,000 is reduced by $22,500, resulting in a new basis of $7,500. However, the distribution first reduces the basis to zero, and the excess is treated as a capital gain. Therefore, the basis is $5,000.

At the Beginning of the Year, Clampett, Incorporated, Had $100,000