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?