86. 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

To determine the taxability of the distribution as a dividend, we need to follow the ordering rules for distributions: first, the distribution reduces AAA, then E&P from current and prior C corporation years, and finally, the remaining amount is treated as a dividend.

In this case, Clampett, Inc. paid out $200,000 in distributions, which exceeds its AAA balance of $100,000. Therefore, the entire AAA balance is distributed, leaving $100,000 of the distribution to be treated as E&P.

J. D.'s share of E&P is $60,000 (Clampett's E&P from prior C corporation years) + $50,000 (current year ordinary income) x 25% = $27,500. Since J. D.'s share of the distribution is $50,000, only $22,500 ($50,000 - $27,500) is treated as a dividend.

Therefore, the answer is C) $12,500 ($22,500 x 55%) since qualified dividends are taxed at a rate of 15% or 20%, depending on the taxpayer's income.

86 at the Beginning of the Year, Clampett, Inc