Question

Sam owns 20% of CCC Corporation. CCC sells diamonds to retail jewelry businesses. While CCC has a deficit in accumulated E & P of $256,000 at the beginning of the year, its current E & P is $400,000. Since the company had a successful year, CCC pays a $50,000 distribution to each of the company’s five shareholders on December 31. Four of the shareholders receive cash, but CCC distributes a diamond (adjusted basis of $70,000 and a fair market value of $50,000) to Sam instead of cash.

           Determine the effect of distributing the diamond on CCC’s and on Sam’s taxable income?

           What is Sam’s basis in the diamond?

           Was the distribution good tax planning on the part of CCC? Why or why not?

Answer 1