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. What is J.D.'s stock basis after the distribution?
A)$45,000
B)$50,000
C)$85,000
D)$90,000
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

J.D.'s stock basis after the distribution would be $45,000. This is because the distribution reduces his basis in the S corporation stock. The distribution is first applied against the stock basis ($50,000), reducing it by the fair market value of the property received ($40,000), resulting in a new basis of $10,000 per shareholder. However, since the basis of the property distributed ($5,000) is less than its fair market value, the basis of the stock is further reduced by the difference ($40,000 - $5,000 = $35,000). Therefore, for each shareholder, including J.D., the correct stock basis after the distribution is $50,000 - $5,000 = $45,000.

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