At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc.
Earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J. D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $10,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a capital gain?

Question

Quizplus · Accepted Answer

Of the $200,000 distributed to shareholders, the first $150,000 is distributed from the AAA account and the remaining $50,000 is distributed from prior C corporation earnings and profits. As a 25% shareholder, J. D.'s share of the distribution out of AAA is $37,500 ($150,000 × 25%). This distribution is nontaxable to the extent of J. D.'s basis ($10,000 + $12,500 distributive share of ordinary income [$50,000 × 25%]), and the excess is taxable as capital gain. Thus, J. D. has $37,500 − $22,500 = $15,000 of capital gain on the distribution.

At the Beginning of the Year, Clampett, Inc