Transcript Document
Slide 7-1
Assignments
For next class:
Problems: C4-33, C4-34, C4-35, C4-37, C4-38,
C4-40, C4-41, C4-42
Chapter
4
Corporate Nonliquidating
Distributions
C Corporations
Earnings and Profits
Slide 7-4
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 7-5
Earnings and Profits (E&P)
Accumulated E&P Calculation:
Beginning accumulated E&P
+ Current period E&P
- Distributions paid out of E&P
= Ending accumulated E&P
Slide 7-6
Earnings and Profits (E&P)
Problems C4-28 and C4-29
Slide 7-7
Earnings and Profits (E&P)
Reminder: Dividends are distributions paid out
of current and accumulated E&P
But what if one is negative and the other is positive?
Slide 7-8
Example 1: E&P Ordering Rules
Assume:
Beginning accumulated E&P is $(100,000)
Current period E&P is $120,000
Cash distributions during the year were $140,000:
$30,000 on 3/31
$30,000 on 6/30
$40,000 on 9/30
$40,000 on 12/31
Q: What portion of the distribution is paid out
of current E&P?
Slide 7-9
E&P Ordering Rules
[IRC §316(a) and Reg. §1.316-2(a)]
Distributions of property made during the year
are first deemed to be paid out of current E&P
Calculated on last day of year, without reducing by
current year distributions [Reg. §1.316-2(b)]
Allocated on pro rata basis regardless of when
distributions are actually made during the year
(distribution/total distributions) [Reg. §1.316-2(b)]
Slide 7-10
E&P Ordering Rules
[Reg. §1.316-2(b)] Distributions of property
made during the year that exceed current E&P
are next deemed to be paid out of accumulated
E&P in chronological order (earliest year first)
Slide 7-11
Example 1: E&P Ordering Rules
Assume:
Beginning accumulated E&P is $(100,000)
Current period E&P is $120,000
Cash distributions of $30,000 on 3/31 and 6/30,
$40,000 on 9/30 and 12/31, total of $140,000
Current E&P is prorated to each distribution:
$30,000 on 3/31 ($25,714 is paid out of E&P)
$30,000 on 6/30 ($25,714 is paid out of E&P)
$40,000 on 9/30 ($34,286 is paid out of E&P)
$40,000 on 12/31 ($34,286 is paid out of E&P)
Slide 7-12
Example 2: E&P Ordering Rules
Assume:
Beginning accumulated E&P is $135,000
Current period E&P is ($76,000)
Cash distribution during the year (paid on April 1st)
was $145,000
Q: What portion of the distribution is paid out
of accumulated E&P?
Slide 7-13
E&P Ordering Rules
[Reg. §1.316-2(b)] When current E&P is
negative and beginning accumulated E&P is
positive
Negative current E&P is prorated to the distribution
date (excluding the distribution date itself) and
subtracted from beginning accumulated E&P
Distribution is deemed to be paid out of E&P to the
extent that the number above is positive
Slide 7-14
Example 2: E&P Ordering Rules
Assume:
Beginning accumulated E&P is $135,000
Current period E&P is ($76,000)
Cash distribution during the year (April 1st) was
$145,000
Prorated current period E&P deficit:
Days from 1/1 to 4/1 = 90
90/365 x ($76,000) = ($18,740)
E&P on 4/1 = $135,000 + ($18,740) = $116,260
$116,260 dividend, $28,740 return of capital
C Corporations
Taxation of Property Distributions
Slide 7-16
Taxation of Shareholders
[IRC §301(c)(1)] Distributions of property that
are dividends are included in the shareholder’s
taxable income
Maximum 15% tax rate for qualifying dividends
received by individual shareholders [IRC §1(h)(11)]
Dividends received deduction allowed for dividends
received by corporate shareholders [IRC §243(a)]
Slide 7-17
Taxation of Shareholders
[IRC §301(c)(2) & (3)] Distributions of
property that are not dividends:
Are applied against and reduce the shareholder’s
adjusted basis in the stock (but not below zero)
Are treated as gains from the sale or exchange of
property if they exceed the stock’s adjusted basis
(capital gain if the stock is a capital asset)
Slide 7-18
Taxation of Shareholders
[IRC §301(d)] The shareholder’s basis in
noncash property received as a distribution from
a C corporation is the property’s FMV on the
date of the distribution (not reduced by any
liabilities assumed)
Slide 7-19
Example 3 - Distributions
A corporation distributes $100,000 to its sole
shareholder, $80,000 of the distribution is paid
out of the corporation’s current and accumulated
E&P. The shareholders basis before the
distribution is $30,000.
$80,000 is taxable dividend income
$20,000 is nontaxable but reduces the shareholder’s
basis to $10,000
Slide 7-20
Example 4 - Distributions
A corporation distributes $100,000 to its sole
shareholder, $45,000 of the distribution is paid
out of the corporation’s current and accumulated
E&P. The shareholders basis before the
distribution is $30,000.
$45,000 is taxable dividend income
$30,000 is a nontaxable return of capital that reduces
the shareholder’s basis to $0
$25,000 is a taxable capital gain
Slide 7-21
Taxation of C Corporation
[IRC §311(a)(2)] Except as otherwise provided
in subsection (b), no gain or loss is recognized to
a corporation on the distribution of property with
respect to its stock
Slide 7-22
Taxation of C Corporation
[IRC §311(b)] C Corporations must recognize
gains on distributions of appreciated property to
shareholders as if the property were sold at its
FMV (appreciated means FMV > adjusted basis)
Gain increases taxable income and FIT
Gain increases E&P (based on E&P basis)
If shareholder assumes a liability as part of the
distribution, the FMV of the property transferred is
deemed to be no less than the amount of the liability
Slide 7-23
Taxation of C Corporation
E&P is reduced (but not below zero) by
Cash distributed [IRC §312(a)(1)]
Principal amount of the corporation’s debt
obligations distributed [IRC §312(a)(1)]
The FMV of any appreciated property distributed
[IRC §312(b)(2)]
The E&P adjusted basis of any other property
distributed [IRC §312(a)(3)]
E&P reduction for distributions is net of any
liabilities that shareholder assumes in connection
with the distribution [IRC §312(c)]
Slide 7-24
Example 5 – Noncash Distributions
A corporation distributes land with a FMV of
$100,000 and an adjusted basis of $108,000 to
its sole shareholder. The shareholder assumes a
$35,000 mortgage on the land. The corporation’s
E&P before considering this distribution is
$120,000. The corporation’s tax rate is 34%.
What are the tax consequences to the
shareholder and the corporation?
Slide 7-25
Example 5 – Noncash Distributions
Shareholder:
Distribution amount equals $65,000
[$100,000 (FMV) less $35,000 (liability assumed)]
$65,000 of taxable dividend income
Basis in land is $100,000 (FMV)
Corporation:
No gain or loss on the distribution
E&P is reduced by $73,000 [$108,000 (basis) less
$35,000 (liability assumed)] to $47,000
Slide 7-26
Example 6 – Noncash Distributions
A corporation distributes land with a FMV of
$125,000 and an adjusted basis of $108,000 to
its sole shareholder. The shareholder assumes a
$35,000 mortgage on the land. The corporation’s
E&P before considering this distribution is
$120,000. The corporation’s tax rate is 34%.
What are the tax consequences to shareholder
and corporation?
Slide 7-27
Example 6 – Noncash Distributions
Shareholder:
Distribution amount equals $90,000
[$125,000 (FMV) less $35,000 (liability assumed)]
$90,000 of taxable dividend income
Basis in land is $125,000 (FMV)
Slide 7-28
Example 6 – Noncash Distributions
Corporation:
$17,000 recognized gain [$125,000 (FMV) less
$108,000 (basis)] on the distribution
E&P effects:
Increases by $17,000 gain recognized
Decreases by $5,780 FIT on gain (at 34%)
Decreases by $90,000 distribution
[$125,000 (FMV) less $35,000 (liability assumed)]
E&P balance is $41,220