Assume that at the end of 2020, Clampett, Incorporated (an S corporation)distributes long-term capital gain property (fair market value of $40,000, basis of $25,000)to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Incorporated, has no corporate earnings and profits and J.D. has a basis of $15,000 in his Clampett, Incorporated, stock. How much total income does J.D. recognize as a result of the distribution?
A)$0
B)$15,000
C)$25,000
D)$40,000
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

Since Clampett, Incorporated, has no corporate earnings and profits, the distribution is treated as a return of capital. Each shareholder reduces his or her basis in the S corporation stock by the amount of the distribution(IRC Section 1368(b)(1)). Therefore, J.D.'s basis is reduced to zero ($15,000 - $40,000 = ($25,000)), and herecognizes a long-term capital gain of $25,000 ($40,000 - $15,000 = $25,000).

Assume That at the End of 2020, Clampett, Incorporated (An