Question

Assume that at the end of 2018, Clampett, Inc. (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, Inc. has no corporate E&P and J. D. has a basis of $15,000 in his Clampett, Inc. stock. How much income does J. D. recognize as a result of the distribution?'

Answer 1

Answer: Income J. D. recognize as a result of the distribution: $45000

Explanation:

First we'll compute the share of gain on distribution,

Share of the gain on the distribution =  $40,000 - $25,000

i.e. $15,000

Now , we'll add the increase in basis from gain from property distribution,

i.e. ($15,000 original basis + $15,000 increase in basis from gain from property distribution)

So income to be recognized :3000+15000 = $ 45000

Answer 2

Answer:

JD will recognize $25,000 as income from the distribution.

Explanation:

In this question , first of all to calculate J.D. income from the distribution, we will take out how much of the gain will J.D. get on the distribution of the long term capital gain asset, where property is divided among 4 equal shareholder as the given market value is $40,000 and the basis given is $25,000, which means that J.D. will gain $15,000 ( $40,000 - $25,000) when the distribution takes place.

The next step would be to see if the distribution of $40,000 per shareholder exceeds the J.D. basis. So here we will calculate J.D. basis as,

   J.D. basis = J.D. original basis in Clampett stock + increase in basis from

                                                                                    gain from the distribution

                                                                                       of long term property.                

J.D. basis = $15,000 + $15,000

                = $30,000

So here we can see that the distribution of $40,000 exceeds the J.D. basis    

by $10,000, so we will add it in to $15,000 which will give us the total income recognized by the J.D. as a result of the distribution.

INCOME OF J.D.   = $15,000 + $10,000

                              = $25,000