Assume that at the end of 2020, Clampett, Incorporated (an S corporation) distributes long-term capital gain property (fair market value of $40,000, basis of $25,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Incorporated, has no corporate earnings and profits and J. D. has a basis of $15,000 in his Clampett, Incorporated, stock. How much total income does J. D. recognize as a result of the distribution

$25,000

Explanation:

The fair market value of the property is $40,000 but the basis is $25,000. J.D will gain the difference as a gain from property distribution:

= 40,000 - 25,000

= $15,000

J.D basis is now :

= 15,000 + 15,000

= $30,000

The distribution of $40,000 exceeds this new basis by:

= 40,000 - 30,000

= $10,000

Total income recognized = Addition to basis + Amount distribution exceeds basis by

= 15,000 + 10,000

= $25,000

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