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Corporate Nonliquidating Distributions

4. Chapter. Corporate Nonliquidating Distributions. C Corporations. Definitions. Definitions. Distributions are generally transfers of property from a corporation to its shareholders that are made with respect to their stock [IRC §301(a)]

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Corporate Nonliquidating Distributions

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  1. 4 Chapter Corporate Nonliquidating Distributions

  2. C Corporations Definitions

  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)]

  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

  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

  6. C Corporations Earnings and Profits

  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

  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

  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

  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

  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

  12. Earnings and Profits (E&P) • Problems C4-28 and C4-29

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