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§316 – Dividend Defined

§316 – Dividend Defined. Distribution out of E & P accumulated after 2-28-13, or to the extent of current E & P. Portion not taxed as a dividend is Return of Capital to extent of basis. Potion in excess of basis is capital gain. Sec. 312 – Earning and Profits Undefined.

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§316 – Dividend Defined

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  1. §316 – Dividend Defined • Distribution out of E & P accumulated after 2-28-13, or to the extent of current E & P. • Portion not taxed as a dividend is Return of Capital to extent of basis. • Potion in excess of basis is capital gain.

  2. Sec. 312 – Earning and Profits Undefined • E & P similar to “retained earnings” but not in all aspects, such as stock dividend does not decrease. • E & P represents Corporations economic ability to pay dividends without impairing capital. • In practice, E & P almost always represents a costly debacle

  3. Increases to E & P • Muni interest • Life insurance proceeds • FIT refunds • DRD • 80% of 179 • Deferred gain if installment method used

  4. Decreases to E & P • Excess capital losses • FIT • Fines and Penalties • 50% M & E • Life insurance premiums • Nondeductible contributions

  5. Stupid E & P Adjustments • Adjustment to straight-line depreciation • §179 over 5 years • Basically, all other timing differences • This is just my opinion

  6. Allocating E & P to Distributions • Current E & P is allocated pro-rata • Accumulated is allocated chronological • If deficit in accumulated E & P and positive in current, then dividends to extent of current E & P • If deficit in current and positive in accumulated, then dividend to extent of net positive balance • Assumption is that current E & P is sufficient

  7. Property Dividends • Amount distributed is Fair Market Value • Amount distributed is decreased by any liabilities • §311(b); gain, but not loss recognized by corporation

  8. Constructive Dividends • Usually arise in closely-held corporation • IRS very good on this issue, easy money • Examples include personal use of corporate-owned property, bargain sales, satisfaction of personal debt, and loans without bona fide business purpose (most common)

  9. Stock Dividends §305(b) • General rule is tax free • Taxable if in lieu of cash or property • Disproportionate distributions taxable • Some common, some preferred taxable • Convertible preferred that results in disproportionality

  10. Stock Redemptions §302(b) and §303 • Sale or Exchange treatment is generally desirable • Not essentially equivalent §302(b)(1) • Substantially disproportionate §302(b)(2) • Complete termination • Redemption to pay “death taxes”

  11. Attribution, §318 • Spouse, children, grandchildren and parents • By partnership proportionately by partners • By estate or trust proportionately by beneficiaries • Proportionately by shareholder owning 50% or more of corporation

  12. U.S. vs Davis , 90 S.Ct. 1041, 3/23/70, • Not essentially equivalent test • Immaterial if redemption had a business purpose • §318 applies • Must result in “meaningful reduction” of shareholder’s interest

  13. Redemption after Termination • §302(b) complete termination • Shareholder may not retain any interest • May not acquire any interest within 10 years • See §302(c)(2)(B)

  14. Redemption to pay death taxes • Corporate stock is > 35% of gross estate • 2 or more corps work if each is > 20% • Applies to extent of death taxes and funeral and admin expense

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