Assume That at the End of 2020, Clampett, Incorporated (An

question 85

Multiple Choice

Assume that at the end of 2020, Clampett, Incorporated (an S corporation) distributes property (fair market value of $59,500, basis of $11,500) to each of its four equal shareholders (aggregate distribution of $238,000) . At the time of the distribution, Clampett, Incorporated, has no corporate earnings and profits and J.D. has a basis of $52,600 in his Clampett, Incorporated, stock. How much total income does J.D. recognize as a result of the distribution?

• A) $0
• B) $11,500
• C) $48,000
• D) $59,500
• E) None of the choices are correct.

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Definitions:

Unlevered Firm

A business or company that operates without any debt financing, meaning it does not have any borrowings in its capital structure.

M&M Proposition I

A theory in corporate finance that asserts that the market value of a company is independent of its capital structure.

Homemade Leverage

refers to the strategy wherein investors adjust the amount of leverage or debt in their investment portfolios on their own, rather than relying on the borrowing strategy of the companies in which they invest.

M&M Proposition

The Modigliani and Miller Proposition, theories that address the impact of capital structure on a company's value and cost of capital.