Assume that at the end of 2020, Clampett, Incorporated (an S corporation)distributes property (fair market value of $40,000, basis of $5,000)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 $50,000 in his Clampett, Incorporated, stock. How much total income does J.D. recognize as a result of the distribution?
A)$0
B)$5,000
C)$35,000
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 of the property is treated as a return of J.D.'s basis in his stock. J.D.'s basis in his stock is $50,000, but he receives property with a fair market value of only $40,000. Therefore, J.D. recognizes a loss of $10,000 ($50,000 - $40,000), but the loss is limited to the amount of the distribution he received. Therefore, J.D. recognizes a loss of $10,000, and his basis in his Clampett, Incorporated stock is reduced to $40,000 ($50,000 - $10,000). Since J.D. does not have any gain on the distribution, his total income recognized is $0.

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