Question

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

Answer 1

$5,000

Step-by-step explanation:

Clampett's accumulated adjustments account (AAA) at the beginning of the year was $100,000 plus the $50,000 that were made in profits = $150,000

So $150,000 of the $200,000 distribution came from the AAA account, and the remaining $50,000 came from retained earnings from prior C corporation years.

JD's basis prior to the distribution = $30,000 + ($50,000 ordinary income x 25%) = $42,500

JD's distribution from AAA = $150,000 x 25% = $37,500

JD's basis after the distribution = JD's basis prior to the distribution - JD's distribution = $42,500 - $37,500 = $5,000