Chapter
4
Corporate Nonliquidating
Distributions
C Corporations
Definitions
Slide 7-3
Definitions
Distributions are generally transfers of property
from a corporation to its shareholders that are
made with respect to their stock [IRC §301(a)]
Property means money, securities, and any
other property except stock of the corporation
making the distribution (or the right to acquire
such stock) [IRC §317(a)]
Slide 7-4
Definitions
[IRC §301(b)(1)] The amount distributed is:
The amount of money transferred
Plus: The FMV of any other property transferred
Minus (but not below zero) : The amount of any
liabilities assumed by the shareholder in connection
with the distribution
Slide 7-5
Definitions
[IRC §316(a)] The term dividend means any
distribution of property made by a C corporation
to its shareholders that is paid out of current or
accumulated earnings and profits
C Corporations
Earnings and Profits
Slide 7-7
Earnings and Profits (E&P)
The taxation of a C corporation’s distributions
to its shareholders depends on its current and
accumulated earnings and profits (E&P)
The term earnings and profits (E&P) is not
specifically defined in the Code
IRC contains some rules about how certain
transactions affect E&P [IRC §312]
Rules for calculating E&P primarily come from
court cases and Treasury Regulations
Slide 7-8
Earnings and Profits (E&P)
Current E&P Calculation:
Regular taxable income (loss)
- Federal income taxes (paid or accrued)
+/- E&P adjustments
= Current E&P
Slide 7-9
Earnings and Profits (E&P)
E&P Adjustments: Increases
Tax-exempt interest income
Life insurance proceeds on key-man insurance
FIT refunds from prior years
Dividends-received deductions
Organizational expense amortization
Percentage depletion over cost depletion
U.S. production activities deduction
Slide 7-10
Earnings and Profits (E&P)
E&P Adjustments: Decreases
Key-man life insurance premiums
Expenses allocable to tax-exempt income
Losses on sales to related parties
50% of meals and entertainment
Fines and penalties
Political contributions and lobbying expenses
Slide 7-11
Earnings and Profits (E&P)
E&P Adjustments: Timing Differences
Net operating losses and capital losses reduce E&P
in the year they are incurred
Charitable contributions (reduce E&P in year paid)
Installment sales (increase E&P in year of sale)
Long-term contracts (percentage-of-completion
method used for E&P)
Depreciation (ADS system)
IRC §179 deduction (spread over 5 years)
IDC capitalized and amortized over 60 months
Slide 7-12
Earnings and Profits (E&P)
Problems C4-28 and C4-29