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. How much, if any, of the distribution is taxable as a dividend?

Question

Quizplus · Accepted Answer

Clampett, Inc. had $100,000 in its AAA and earned $60,000 of E&P in prior years. Therefore, the company had a total of $160,000 available to distribute as a dividend without being subject to corporate-level tax. However, the company only distributed $200,000 to shareholders, which means that $40,000 of the distribution is taxable as a dividend. 
J.D. owns 25% of the company, so his share of the distribution is $50,000. J.D.'s share of the taxable dividend is calculated as follows: 
Taxable dividend = ($40,000 ÷ total distribution) x J.D.'s share of the distribution 
= ($40,000 ÷ $200,000) x $50,000 
= $10,000 
Therefore, $10,000 of J.D.'s distribution is taxable as a dividend.

At the Beginning of the Year, Clampett, Inc