Assume that at the end of 2017,Clampett,Inc.(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,Inc.has no corporate E&P and J.D.has a basis of $50,000 in his Clampett,Inc.stock.How much income does J.D.recognize as a result of the distribution?

Question

Quizplus · Accepted Answer

When a corporation distributes a property that has a fair market value in excess of its basis, the distributing corporation must recognize gain on the distribution. In this case, the property's fair market value is $40,000, and its basis is $5,000, resulting in a recognized gain of $35,000 ($40,000 - $5,000). Since J.D. received a distribution of $40,000, the full amount is considered a taxable gain to him. Therefore, J.D. must recognize $35,000 of income on the distribution.

Assume That at the End of 2017,Clampett,Inc