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 that exceeds his share of the company's earnings. His share of the $50,000 earnings is $12,500, so his basis is reduced by $37,500 ($50,000 distribution - $12,500 earnings), resulting in a new basis of $5,000 ($30,000 initial basis - $25,000 excess distribution).

At the Beginning of the Year, Clampett, Inc