Distribution from a Corporation

Question 1

What are 3 tax steps for ordinary (cash) distributions?

Answer 1

1. Taxable as dividend income to extent of the shareholder’s pro-rata share of EandP.
2. Excess is tax free to extent of shareholder’s basis in stock (reduces basis).
3. Remaining distribution amount is taxed as a capital gain.

Question 2

Question:
TP received a corporate distribution of $10,000. Earnings and profits: $3,000. Basis in stock: $4,000.
What are tax consequences?

Answer 2

1. Dividend income: 3,000.
2. Tax free: 4,000
3. Capital gain: 3,000.

Question 3

Property distribution: how is the amount distributed determined?

Answer 3

Amount distributed = FMV - liabilities on property.

Question 4

Property distribution: what is the basis of the property to the shareholder?

Answer 4

FMV.

Question 5

Earnings and profits: what does it measure? How is it computed?

Answer 5

The corporation’s economic ability to pay a dividend.

Computed by making adjustments to taxable income.

Question 6

Earnings and profits: what items increase it? Decrease it?

Answer 6

Increase: All items of income, including tax-exempt income.
Decrease: both deductible and nondeductible expenses and losses.

Question 7

Earnings and profits: what depreciation system must be used?

Answer 7

The alternative depreciation system (straight-line).

Question 8

Earnings and profits: what amount is reduced by cash distributions?

Answer 8

The amount of money distributed.

Question 9

Earnings and profits: what amount is reduced by property distribution? What items Increase it?

Answer 9

Reduce: By the greater of FMV or the adjusted basis of the property distributed.
Increase: any liability assumed by the recipiant, Gain recognized.

Question 10

Questions:
Corporation distributes property with FMV of $1,000 and a basis of $1,200. A shareholder assumes a liability attached to the property of $300.
Reduction in earnings and profit?

Answer 10

The greater of FMV (1,000) or
the adjusted basis (1,200) is $1,200.

The reduction is $900 (1,200-300).

Question 11

Earnings and profits: when current is positive and accumulated is positive, what is the result re: dividend?

Answer 11

Dividend income of both current and accumulated earnings and profits.

Question 12

Earnings and profits: when current is negative and accumulated is negative, what is the result re: dividend?

Answer 12

No dividend income (no step 1. go to step 2)

Question 13

Earnings and profits: when current is positive and accumulated is negative, what is the result re: dividend?

Answer 13

Dividend income to extent of current earnings and profits.

Question 14

Earnings and profits: when current is negative and accumulated is positive, what is the result re: dividend?

Answer 14

Net current and accumulated = dividend income.

Question 15

Property dividend: when appreciation is built in the property, what is the treatment at the time of distribution? If liability attached exceeds FMV?

Answer 15

• Gain (but never losses) must be recognized as if the property was sold to the shareholder at FMV.
• if there is a liability on the property that is assumed by the shareholder and the amount of liability exceeds the property’s fair market value, then the amount of liability is used to measure the gain: Liability-basis=gain

Question 16

Question:
Corporation was organized in Yr 1. At Dec 31, Yr 5, accumulated earnings and profits was $9,000. Cash was distributed: $9,000. A land was distributed: basis of $5,000 and FMV of 40,000.
What is the shareholder’s taxable dividend income?

Answer 16

• Amount distributed: cash (9,000) + Land (40,000) = $49,000.
• Gain from distribution: FMV (40,000) - Basis (5,000) = 35,000.
• Earnings and profits: accumulated (9,000) + gain (35,000) = $44,000.

Therefore, taxable dividend income is $44,000.

Question 17

When there is a deficit in current earnings and profits, what is the treatment?
ie. A deficit earnings and profits of 40,000 and there is a distribution on Apr 1, how much of the distribution get allocated to the earnings and profits?

Answer 17

It is allocated ratably during the year based on time, even if there is only one distribution for the year.

i.e. only 1/4 (April 1 = only 1 quarter passed).

Question 18

When there are more than one distribution and current earnings and profits is positive, what is the treatment?
i.e. current earnings and profits: 40,000. Only one distribution. what is the allocation of earnings and profits?

Answer 18

Current earnings and profits is prorated among the distributions based on the amount of the distributions.

The whole $40,000.

Question 19

Question:
Retained earnings: $100,000. Sold land for $50,000. Cost: 40,000. FMV: 80,000.
What is the taxable dividend income?

Answer 19

If a corporation sells property to a shareholder for less than fair market value, the shareholder generally is considered to have received a constructive dividend to the extent of the difference between the fair market value of the property and the price paid. Thus, the shareholder’s dividend income is $80,000 − $50,000 = $30,000.