Assume that at the end of 2020, Clampett, Incorporated (an S corporation)distributes property (fair market value of $43,000, basis of $6,000)to each of its four equal shareholders (aggregate distribution of $172,000). At the time of the distribution, Clampett, Incorporated, has no corporate earnings and profits and J.D. has a basis of $50,400 in his Clampett, Incorporated, stock. How much total income does J.D. recognize as a result of the distribution?
A)$0
B)$6,000
C)$37,000
D)$43,000
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

The distribution is treated as a dividend to the extent of the corporation's earnings and profits. Since Clampett, Incorporated, has no earnings and profits, the distribution is treated as a return of capital to the extent of the shareholder's basis in the stock. J.D.'s basis in his Clampett, Incorporated, stock is $50,400. Therefore, the distribution is treated as a return of capital to the extent of $50,400. The remaining $37,000 of the distribution is treated as a capital gain.

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