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 $10,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a capital gain?

Question

Quizplus · Accepted Answer

J.D.'s share of the distribution ($50,000) exceeds his basis ($10,000) by $40,000. The distribution first reduces his basis to zero, and the excess ($40,000) is treated as a capital gain. However, the distribution is first applied against the AAA and earnings and profits, which total $110,000. J.D.'s share of this is $27,500, which is not a capital gain. Therefore, the remaining $15,000 is taxable as a capital gain.

At the Beginning of the Year, Clampett, Inc