C Corp Distribution Lingo

1
C Corp Distribution Lingo
1. Dividend Corp distributes cash or
property to shareholders as a result of
operations not part of redemption of stock or
liquidation. Distribution is with respect to
stock and qualifies as dividend under 316. 2.
Return of Capital - Corp distributes cash or
property with respect to its stock which is not
316 dividend, nor part of redemption or
liquidation. 3. Stock dividend Corp
distributes its own stock or debt obligation to
its shareholders as a result of operations not
associated with a redemption or liquidation. 4.
Redemption Corp distributes money or property
to shareholder to purchase (or redeem) stock
owned by the shareholder. 5. Liquidation Corp
distributes money or property to shareholder as
part of plan to liquidate or partially liquidate
the business of the corporation.
2
316 Dividend Definition
Distribution is treated as dividend if
1. Out of earnings and profits accumulated since
2/28/1913 2. Out of its earnings and
profits for the current year, determined at end
of year and without regard to E P amount at
time of distribution. Priority rules -
Every distribution deemed made from E P to
the extent thereof. Corp cant designate
otherwise. - Distributions deemed made
from the most recent E P.
3
The 301 Triple Tax Priority
Distribution Amount Amount of money plus fair
market value of property distributed. Triple
Priority Distribution with respect to stock
Priority One If dividend under 316,
included in gross income. Priority Two
If not dividend, applied to reduce adjusted basis
of stock. Tax free return of
capital. Priority Three If exceeds
basis, excess treated as gain from the
sale or exchange of property.
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Determining E P
Concept The true economic growth and
improvement of the corporation. No precise
definition. Calculation Start with taxable
income, then Increase for other economic
gains Tax exempt interest, life insurance
proceeds, tax refunds, etc. (but not
nonrecognition gains under 1033, 351, etc.)
Increase for deductions that have no
economic effect Dividends received deduction,
excess percentage depletion, etc.
Decrease for economic losses not reflected in
taxable income federal taxes, losses between
related parties, excess T E expenses
Timing differences Depreciation, 453
installment sales FIFO inventory, etc.
5
Problem 518
Current Earnings and Profits Calculation
Taxable Income
8,450 Add Items
Tax-exempt interest
3,000 Dividend deduction
3,500 Excess Depreciation
1,800 (STL, half yr.
convention) Total
Increases
8,300 Subtract Items
Excess LTGL (current only)
2,500 Est. fed taxes
800 Total
Decreases
(3,300) Current E P

13,450
6
Problem 518
Taxable Income Calculation Income items
Gross profit from sales
20,000 Dividends
5,000 LTCG

2,500 Total
27,500 Deductions
Salaries
10,250 Dividend deduction
(243) 3,500
Depreciation
2,800 LTCL (To extent of LTCG)
2,500 Total

19,050 Taxable Income
8,450
7
Problem 522

• Basic Facts A owns all common stock of P Corp,
  basis of 10k from prior 351 exchange.
• Year 1 5k current EP, no accumulated EP,
  17.5k distribution. What tax effect.
• - 5k dividend for current EP per 316
  and 301.
• - 10k return of capital
• - 2.5k treated as gain on sale of
  stock per 301. May be LTCG.
• A stock basis reduced to 0. P Corps EP
  is 0.
• Year 2 15k deficit in accumulated EP. Current
  EP 10k and 10k distributed to A.
• - A has 10k dividend per 316(a)(2).
• - P Corps accumulated deficit EP
  remains at 15k.
• - P Corps current EP reduced to 0
  per 312(a)(1).

8
Problem 522

• Basic Facts A owns all common stock of P Corp,
  basis of 10k from prior 351 exchange.
• Year 2 10k accumulated EP. 4k current EP.
  April 1 10k to A. July 1 A sells ½ stock to
  B for 15k. Oct 1 5k to A, 5k to B.
• - Current EP allocated pro rata to
  all distributions in year. Accumulated EP
  allocated on first come-first serve basis. Thus
• - April 1 10k distribution to A 2k
  from current EP and 8k from accumulated.
  Current reduce to 2k, accumulated reduced to 2k
  (10k-8k).
• - October 1 10k distribution to A
  B 2k for current (1k each) and 2k from
  accumulated (1k each). Each have return of
  capital of 3k (5k-2k).
• P Corp EP reduced to 0.

9
Problem 522
Basic Facts A owns all common stock of P Corp,
basis of 10k from prior 351 exchange. (d) Year 2
10k accumulated EP. 10k current deficit EP.
April 1 10k to A. July 1 A sells ½ stock to
B for 15k. Oct 1 5k to A, 5k to B.
- Current EP deficit allocated pro rata during
year to reduce accumulated EP. Accumulated EP
allocated on first come-first serve basis. Thus
- April 1 10k distribution to A 2.5 k
from current deficit (1/4 year), so accumulated
EP down to 7.5k. Dividend 7.5k, return of
capital 2.5k. - October 1 10k
distribution to A B No EP left, so all
return of capital. - Bs basis
reduced from 15k to 10k. - As 10k
basis reduced to 7.5k by 4/1 distribution and to
2.5k by 10/1 distribution. Sale of half stock to
B creates 13,750 gain (15k less 1.25k basis).

10
Problem 527

• Basic Facts Z owns all common stock of S Corp,
  basis of 8k 25k accumlated EP, no current EP.
• S distributes to Z inventory FMV 20k, basis
  11k.
• - S Corp has gain of 9k (20k-11k) per
  311(b)(1) and current EP goes to 9k.
• - Z has 20k dividend 9k from current
  EP 11k from accumulated EP
• - Z basis in inventory 20k.
• - S Corp accumulated EP to next year 14k
  (25k-11k)
• (b) Same as (a) but no accumulated EP.
• - S Corp has gain of 9k (20k-11k) per
  311(b)(1) and current EP goes to 9k.
• - Z has 9k dividend 9k from current EP
  8k return of capital 3k LTCG
• - Z basis in inventory 20k.
• - S Corp accumulated EP to next year is
  0. Property distribution reduces EP to extent
  thereof per 312(a).

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Problem 527
Basic Facts Z owns all common stock of S Corp,
basis of 8k 25k accumulated EP, no current
EP. (c) S distributes to Z land FMV 20k,
basis 11k, debt 16k. - S Corp has gain
of 9k 1231 gain (20k-11k) per 311(b)(1) and
current EP goes to 9k. - Z has 4k
dividend (20k less 16k) Plenty of accumulated
EP - Z basis in land 20k. - S
Corp accumulated EP to next year is 30k (25k
plus 9k gain, less 4k distribution)
12
Problem 527
Basic Facts Z owns all common stock of S Corp,
basis of 8k 25k accumulated EP, no current
EP. (d) S has 15k current EP distributes to Z
land FMV 20k, basis 30k. - S Corp has
loss of 10k (30k-20k), but cant recognize per
311(a) - Z has 20k dividend Plenty of
accumulated EP - Z basis in land 20k.
- S Corp accumulated EP to next year is 10k
(25k 15k current E P, less 30k basis in
land) Note if sold and then distributed cash,
S Corp recognizes 10k loss. Z still has 20k
dividend. S Corps EP carryover still 10k (40k
less 10k loss, less 20k distribution). Only
difference is 10k recognized loss.
13
Problem 527
Basic Facts Z owns all common stock of S Corp,
basis of 8k 25k accumulated EP, no current
EP. (e) S distributes to Z equipment FMV
10k, basis 0 for tax 2k for EP - S
Corp has gain of 10k ordinary gain (10k-0k).
- Z has 10k dividend Plenty of accumulated
EP - Z basis in equipment 10k. -
S Corp accumulated EP to next year is 23k (25k
10k gain, less 2k basis in land, less 10k
distribution)