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 $30,000,and his share of the distribution was $50,000.What is J.D.'s basis in the Clampett,Inc.stock after these transactions?

Question

Quizplus · Accepted Answer

J.D.'s basis is reduced by his share of the distribution. Starting with a basis of $30,000, subtract his share of the distribution ($50,000), but it cannot go below zero. The distribution is first applied against the AAA ($100,000 total, J.D.'s share is $25,000), then against the earnings and profits ($60,000 total, J.D.'s share is $15,000). The remaining $10,000 of the distribution is a return of capital, reducing his basis to $5,000.

At the Beginning of the Year,Clampett,Inc