C Corp Distribution Lingo

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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.
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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.
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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.
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Problem 168
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
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Problem 168
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
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Problem 172

• 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).

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Problem 172

• 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.

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Problem 172
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).

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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.



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Problem 712 - 1

• Basic Facts A Corp calendar year S D owns
  1/3, share basis 3k M owns 2/3, share basis 5k
  Corp has 9k net operating income, 3k LTCG.
• 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.
• A 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.

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Problem 713 - 1

• Basic Facts A Corp calendar year S D owns
  1/3, share basis 3k M owns 2/3, share basis 5k
  Corp has 9k net operating income, 3k LTCG.
• A Corp redeems all Ds stock for 20k on 12/31.
  Basis still 7k. 13k gain recognized on sale.
• 10/15, redeem ¼ D stock for 5k, ¼ M stock for
  10k. Considered dividend because pro rata. Same
  answer as (a).
• (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.

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Problem 713 - 1

• Basic Facts A Corp calendar year S D owns
  1/3, share basis 3k M owns 2/3, share basis 5k
  Corp has 9k net operating income, 3k LTCG.
• 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 on stock sale basis
  in note 8k.
• M 13k pre-distribution basis zero basis
  post-distribution 3k gain on stock sale basis
  in note 16k.

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Problem 713 - 2

• Basic Facts P Corp new S corp, 6k accumulated
  EP from C years. O N equal shareholders O
  basis 5k, N basis 1k. P current operating income
  6k (32-18-8) and LTCG of 4k.
• 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 basis pre-distribution basis to 6k,
  then reduced to 1k post-distibution.
• - P Corp accumulated adjustment account
  increased 10k for earnings (6k plus 4k) and then
  reduced 10k for distributions. Hence, zero.
• Same, but 10k each distribution. O 5k current
  accum. adj account 3k accumulated EP 2k
  reduction in basis. Basis reduced to 3k.
• N 5k accum adj. account 3k accumulated
  EP 1k basis recovery 1k gain on stock sale.
  Stock basis 0.
• P Corp accum adj account is zero.

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Problem 713 - 2

• Basic Facts P Corp new S corp, 6k accumulated
  EP from C years. O N equal shareholders O
  basis 5k, N basis 1k. P current operating income
  6k (32-18-8) and LTCG of 4k.
• Same as (a), but P Corp also received 4k tax
  exempt interest and distributes 2k each to N and
  O.
• 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.
• (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.

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Problem 713 - 2

• Basic Facts P Corp new S corp, 6k accumulated
  EP from C years. O N equal shareholders O
  basis 5k, N basis 1k. P current operating income
  6k (32-18-8) and LTCG of 4k.
• 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.