§316 – Dividend Defined
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Distribution out of E & P accumulated
after 2-28-13, or to the extent of
current E & P.
Portion not taxed as a dividend is
Return of Capital to extent of basis.
Potion in excess of basis is capital gain.
Sec. 312 – Earning and Profits
Undefined
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E & P similar to “retained earnings” but
not in all aspects, such as stock
dividend does not decrease.
E & P represents Corporations economic
ability to pay dividends without
impairing capital.
In practice, E & P almost always
represents a costly debacle
Increases to E & P
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Muni interest
Life insurance
proceeds
FIT refunds
DRD
80% of 179
Deferred gain if
installment method
used
Decreases to E & P
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Excess capital losses
FIT
Fines and Penalties
50% M & E
Life insurance
premiums
Nondeductible
contributions
Stupid E & P Adjustments
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Adjustment to
straight-line
depreciation
§179 over 5 years
Basically, all other
timing differences
This is just my
opinion
Allocating E & P to
Distributions
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Current E & P is allocated pro-rata
Accumulated is allocated chronological
If deficit in accumulated E & P and positive in
current, then dividends to extent of current E
&P
If deficit in current and positive in
accumulated, then dividend to extent of net
positive balance
Assumption is that current E & P is sufficient
Property Dividends
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Amount distributed
is Fair Market Value
Amount distributed
is decreased by any
liabilities
§311(b); gain, but
not loss recognized
by corporation
Constructive Dividends
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Usually arise in closely-held corporation
IRS very good on this issue, easy
money
Examples include personal use of
corporate-owned property, bargain
sales, satisfaction of personal debt, and
loans without bona fide business
purpose (most common)
Stock Dividends §305(b)
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General rule is tax free
Taxable if in lieu of cash
or property
Disproportionate
distributions taxable
Some common, some
preferred taxable
Convertible preferred
that results in
disproportionality
Stock Redemptions §302(b)
and §303
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Sale or Exchange
treatment is generally
desirable
Not essentially
equivalent §302(b)(1)
Substantially
disproportionate
§302(b)(2)
Complete termination
Redemption to pay
“death taxes”
Attribution, §318
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Spouse, children,
grandchildren and
parents
By partnership
proportionately by
partners
By estate or trust
proportionately by
beneficiaries
Proportionately by
shareholder owning
50% or more of
corporation
U.S. vs Davis , 90 S.Ct. 1041,
3/23/70,
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Not essentially
equivalent test
Immaterial if
redemption had a
business purpose
§318 applies
Must result in
“meaningful reduction”
of shareholder’s interest
Redemption after Termination
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§302(b) complete
termination
Shareholder may not
retain any interest
May not acquire any
interest within 10
years
See §302(c)(2)(B)
Redemption to pay death
taxes
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Corporate stock is >
35% of gross estate
2 or more corps
work if each is >
20%
Applies to extent of
death taxes and
funeral and admin
expense