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.
4
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 169
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
LLM Corporate Tax Instructor
Dwight Drake
6
Problem 169
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
LLM Corporate Tax Instructor
Dwight Drake
7
Problem 173 (a)
17.5k Distribution
Pelican Corp.
Ann
5k Current EP Zero Accumulated EP
10k Stock Basis
(a) Year 1 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.
8
Problem 173 (b)
10k Distribution
Pelican Corp.
Ann
10k Current EP -15k Accumulated EP
10k Stock Basis
(b) Year 2 - 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).

LLM Corporate Tax Instructor
Dwight Drake
9
Problem 173 (c)
10k on 4/1, 5k on 10/1
Pelican Corp.
Ann
10k Stock Basis
5k on 10/1
½ Stock for 15k on July 1
4k Current EP 10k Accumulated EP
BakerCorp
(c) Year 2 - 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 reduced 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.
LLM Corporate Tax Instructor
Dwight Drake
10
Problem 173 (d)
10k on 4/1, 5k on 10/1
Pelican Corp.
Ann
10k Stock Basis
5k on 10/1
½ Stock for 15k on July 1
4k Current EP -10k Accumulated EP
BakerCorp
(d) 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).
LLM Corporate Tax Instructor
Dwight Drake
11
Problem 173 (c) (d) Clarification
Issue What is As basis in stock on sale of ½
to B on 7/1? Two Possibilities Determine at end
of year or at time of sale. If end of year
determination (c) Basis would be (10k 3k
return of capital on 10/1) / 2 3.5k. Gain on
sale would be 15k less 3.5k 11.5k. Basis in
As remaining shares 3.5k. (d) Basis would
be (10k 2.5 return on 4/1 5k return 10/1) /
2 1.25k. Gain on sale would be 13.75k. Basis
in As remaining shares would be 1.25k. If time
of sale determination (c) Basis would be 10k
/ 2 5k. Gain on sale 10k. Basis in remaining
share would be 5k less 3k 2k. (d) Basis
would be (10k 2.5k return on 4/1) / 2 3.75k.
Gain on sale would be 11.25k (15k less 3.75k).
Basis in As remaining shares would be 3.75
before 10/1 5k distribution, which would take
basis to zero and trigger 1.25 gain to A. Which
approach correct? ??, but most think end of year.

LLM Corporate Tax Instructor
Dwight Drake
12
S Corp Distributions - 1368

• No C corp EP
  
• First - Tax free to extent of shareholders
  basis in stock. Reduce basis per 1367.
• Second - Excess treated as gain from the
  sale of stock.
• Yes C corp EP
• First - Tax free reduction of basis to
  extent of AAA (accumulated adjustment account).
• Second - Taxable dividend to extent of
  accumulated E P.
• Third - Tax free reduction in basis to
  extent of remaining basis in stock.
• Fourth Excess treated as gain from the
  sale of stock.

LLM Corporate Tax Instructor
Dwight Drake
13
Problems P. 712 1(a)
S Corp
B
A
200 Shrs 12k Basis
100 Shrs 6k Basis

• (a) Reporting of income, loss items
• Nonseparately computed income
  
• Income
  92k
• 1245 gain
  7k
• Salary
  (44k)
• Depreciation
  (8k)
• Property taxes
  (7k)
• Supplies
  (4k)
• Income
  36k
• A report 24k (2/3) of computed income.
• B report 12k (1/3) of computed income.

LLM Corporate Tax Instructor
Dwight Drake
14
Problems P. 712 1(a)
S Corp
B
A
200 Shrs 12k Basis
100 Shrs 6k Basis

A
B Separately stated items Tax-exempt
interest 667
333 Margin interest
4,000 2,000
1231 Gain 8,000
4,000 STCG (AtT)
5,000
2,500 Net LTCG
4,000 2,000 Bad
debt recovery 3,000
1,500
LLM Corporate Tax Instructor
Dwight Drake
15
Problems P. 712 1(b)
S Corp
B
A
200 Shrs 12k Basis
100 Shrs 6k Basis
(b) Basis calculation
A B Beginning basis
12,000
6,000 Separately stated items
Tax-exempt interest 667
333 Margin interest
(4,000)
(2,000) 1231 Gain
8,000 4,000
STCG (AtT) 5,000
2,500 Net LTCG
4,000
2,000 Bad debt recovery
3,000 1,500 Net income
share 24,000
12,000 Non-deductible bribe
(4,000)
(2,000) Year-end basis
48,667. 24,333

LLM Corporate Tax Instructor
Dwight Drake
16
Problems P. 712 1(c),(d),(e)
S Corp
B
A
200 Shrs 12k Basis
100 Shrs 6k Basis
(c) Whose accounting period controls timing of
recognition? S Corps control. (d) If 1033
election opportunity to defer gain, who must
make? S Corp. Entity level elections
required. (e) Any difference if equipment
would have been capital asset if held by A? 1366
(b) provides character of item determined as if
such item realized directly from the source
realized by corporation. Hence, generally will
result in entity level characterization.


LLM Corporate Tax Instructor
Dwight Drake
17
Problems P. 716 1(a)
S Corp
M
D
5k on 10/1
10k on 10/1
2/3 Shrs 5k Basis
1/3 Shrs 3k Basis
9k operating income 3k LTGC
(a) A Corp distributes 5k to D and 10k to M on
10/15. D 3k of ordinary income 1k
LTCG. Basis adjusted up 4k to 7k. Basis
adjustment required before characterizing
distribution. 5k reduces basis to 2k. M
6k ordinary income 2k LTCG. Basis
pre-distribution up to 13k after 10k
distribution down to 3k.
LLM Corporate Tax Instructor
Dwight Drake
18
Problems P. 716 1(b)
S Corp
M
D
8k on 10/1
16k on 10/1
2/3 Shrs 5k Basis
1/3 Shrs 3k Basis
9k operating income 3k LTGC

• (b) S Corp distributes 8k to D, 16k to M.
• D Pre-distribution 7k basis reduced to
  zero. 1k gain on sale of stock.
• M Pre-distribution 13k basis reduced to
  zero 3k gain on sale.

LLM Corporate Tax Instructor
Dwight Drake
19
Problems P. 716 1(c)
S Corp
M
D
20k for shrs on 12/31
2/3 Shrs 5k Basis
1/3 Shrs 3k Basis
9k operating income 3k LTGC
(c) A Corp redeems all Ds stock for 20k on
12/31. Basis still 7k. 13k gain recognized on
sale.
LLM Corporate Tax Instructor
Dwight Drake
20
Problems P. 716 1(d)
S Corp
M
D
5k for ¼ shrs on 10/15
10k for ¼ shrs on 10/15
2/3 Shrs 5k Basis
1/3 Shrs 3k Basis
9k operating income 3k LTGC
(d) On 10/15, redeem ¼ D stock for 5k, ¼ M stock
for 10k. Considered dividend because pro rata.
Same answer as (a).
LLM Corporate Tax Instructor
Dwight Drake
21
Problems P. 716 1(e)
S Corp
M
D
8k land with 9k basis
16k land with 13k basis
2/3 Shrs 5k Basis
1/3 Shrs 3k Basis
9k operating income 3k LTGC
(e) Land to D 8k FMV, 9k basis. Land to M
16k FMV, 13k basis. D No loss to corp 1k
of 3k gain on land to M increase pre-distribution
basis to 8k land distribution reduce basis by
FMV (8k) to zero. D basis in land 8k. M
Corp has 3k gain, 2k allocated to M.
Pre-distribution basis is 15k. Land distribution
16k 1k treated as gain on stock sale. M basis
in land is 16k.
LLM Corporate Tax Instructor
Dwight Drake
22
Problems P. 716 1(f)
S Corp
M
D
8k 5-yr S Corp Note
16k 5-yr S Corp Note
2/3 Shrs 5k Basis
1/3 Shrs 3k Basis
9k operating income 3k LTGC
(f) 12 notes distributed by A Corp, 8k FMV to
D, 16K FMV to M. No corp gain under
311(b)(1)(A). D 7k pre-distribution
basis zero basis post-distribution 1k gain as
if property sale basis in note 8k. M
13k pre-distribution basis zero basis
post-distribution 3k gain as if property sale
basis in note 16k.
LLM Corporate Tax Instructor
Dwight Drake
23
Problems P. 716 2(a)
Converted S Corp
M
N
5k on 11/1
5k on 11/1
1/2 Shrs 5k Basis
1/2 Shrs 1k Basis
6k EP from C years 6k Oper. Income, 4k LTGC
(a) Distributes 5k to each of O and N on 11/15.
- Basis of each increased 3k plus 2k, or
5k. O basis pre-distribution increased to 10k,
then down to 5k post-distribution. - N
pre-distribution basis increased to 6k, then
reduced to 1k post-distribution. - P Corp
accumulated adjustment account increased 10k for
earnings (6k plus 4k) and then reduced 10k for
distributions. Hence, zero.
LLM Corporate Tax Instructor
Dwight Drake
24
Problems P. 716 2(b)
Converted S Corp
M
N
10k on 11/1
10k on 11/1
1/2 Shrs 5k Basis
1/2 Shrs 1k Basis
6k EP from C years 6k Oper. Income, 4k LTGC

• 10k distribution to each.
• O First 5k current accum. adj account
  Dividend of 3k for accumulated EP 2k reduction
  in basis. Basis reduced to 3k.
• N 5k accum adj. account Dividend of 3k
  accumulated EP 1k basis recovery 1k gain as if
  stock sale. Stock basis 0.
• Corp accum adj account and EP both
  zero.

LLM Corporate Tax Instructor
Dwight Drake
25
Problems P. 716 2(c)
Converted S Corp
M
N
7k on 11/1
7k on 11/1
1/2 Shrs 5k Basis
1/2 Shrs 1k Basis
6k EP from C years 6k Oper. Income, 4k LTGC, 4k
Tax exempt interest
(c) P Corp received 4k tax exempt interest and
distributes 7k to each. N Basis in
stock increased to 8k (1k plus 5k plus 2k). 5k
is distribution of accum. adjustment account
(which not increased for tax-exempt interest) 2k
extra distribution dividend of C corp earnings.
N stock basis 3k. O Basis in stock
increased to 12k (5k plus 5k plus 2k). 5k is
distribution of accum. adjustment account (which
not increased for tax-exempt interest) 2k extra
distribution dividend of C corp earnings. N
stock basis 7k.
LLM Corporate Tax Instructor
Dwight Drake
26
Problem 716-2(d), (e)

• (d) N sells stock to R for 6k on 1/1 next year.
  10k accumulated EP. No
• earnings next year. Corp distributes 6k to R in
  2/15. 5k basis recovery from
• accum adj. account picked up as Ns transferee.
  1k dividend from C corp
• EP.
• (e) No distribution current year. 1/1 next year
  revoke S election. 5k EP next year and 7k
  distribution to each shareholder on 8/1 next
  year.
• - Per 1371(e)(1) distributions of former
  S corp during post-termination transition
  period (1 yr after last S day) may be treated as
  basis recovery from accum. Adj. account. So,
  here 5k to each can be basis recovery (because
  that each share of 10k accum. Adjust. Acount from
  prior year) and 2k dividend.
• - Per 1371(e)(2), may elect to treat all
  as dividend. C corp EP 11k (6k prior and 5k
  current), do dividend 5.5k to each if election
  made. Extra 1.5k treated as return of capital.

LLM Corporate Tax Instructor
Dwight Drake