Chapter 4 4 Corporate Nonliquidating Distributions.

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Chapter 4 4 Corporate Nonliquidating Distributions

C Corporations Definitions

Slide 7-3 Definitions Distributions are generally transfers of property from a corporation to its shareholders that are made with respect to their stock [IRC §301(a)] Property means money, securities, and any other property except stock of the corporation making the distribution (or the right to acquire such stock) [IRC §317(a)]

Slide 7-4 Definitions [IRC §301(b)(1)] The amount distributed is: The amount of money transferred Plus: The FMV of any other property transferred Minus (but not below zero) : The amount of any liabilities assumed by the shareholder in connection with the distribution

Slide 7-5 Definitions [IRC §316(a)] The term dividend means any distribution of property made by a C corporation to its shareholders that is paid out of current or accumulated earnings and profits

C Corporations Earnings and Profits

Slide 7-7 Earnings and Profits (E&P) The taxation of a C corporation’s distributions to its shareholders depends on its current and accumulated earnings and profits (E&P) The term earnings and profits (E&P) is not specifically defined in the Code IRC contains some rules about how certain transactions affect E&P [IRC §312] Rules for calculating E&P primarily come from court cases and Treasury Regulations

Slide 7-8 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 7-9 Earnings and Profits (E&P) E&P Adjustments: Increases Tax-exempt interest income Life insurance proceeds on key-man insurance FIT refunds from prior years Dividends-received deductions Organizational expense amortization Percentage depletion over cost depletion U.S. production activities deduction

Slide 7-10 Earnings and Profits (E&P) E&P Adjustments: Decreases Key-man life insurance premiums Expenses allocable to tax-exempt income Losses on sales to related parties 50% of meals and entertainment Fines and penalties Political contributions and lobbying expenses

Slide 7-11 Earnings and Profits (E&P) E&P Adjustments: Timing Differences Net operating losses and capital losses reduce E&P in the year they are incurred Charitable contributions (reduce E&P in year paid) Installment sales (increase E&P in year of sale) Long-term contracts (percentage-of-completion method used for E&P) Depreciation (ADS system) IRC §179 deduction (spread over 5 years) IDC capitalized and amortized over 60 months

Slide 7-12 Earnings and Profits (E&P) Problems C4-28 and C4-29