Corporate Nonliquidating Distributions
Discussion Questions
C:-
A corporation computes current E&P on an annual basis by making adjustments to
taxable income so that the resulting amount represents the corporation's economic ability to pay
dividends out of the current year's earnings.
The specific adjustments required are outlined in
Table C:4-1.
Accumulated E&P is the sum of the current E&P (less distributions made out of
current E&P) balances for all previous years reduced by the sum of (1) all previous current E&P
deficits and (2) any distributions that have been made out of accumulated E&P.
pp. C:4-3 and
C:4-4.
C:-
Distributions are deemed to come first out of current E&P and then out of accumulated
E&P.
Thus, if current E&P is positive, any distributions will be dividends to the extent of the
current E&P even if accumulated E&P is negative.
Also, if E&P is insufficient to cover all
distributions, distributions are deemed to come pro rata out of current E&P and then in
chronological order out of accumulated E&P.
pp. C:4-6 through C:4-8.
C:-
a.
b.
First, $60,000 of the distribution is a dividend from current E&P.
Second,
$25,000 is a return of capital that reduces the shareholder's stock basis to zero.
Third, the
remaining $15,000 is a capital gain.
The $50,000 accumulated E&P deficit remains.
c.
First, $25,000 of the distribution is a return of capital that reduces the
shareholder's stock basis to zero. Second, the remaining $75,000 is a capital gain.
A $120,000
d.
The distribution is a $100,000 dividend payable out of accumulated E&P.
None
of the current E&P deficit reduces accumulated E&P since the distribution is made on January 1.
If the corporation makes the distribution on October 1, the answers to Parts a through c
are the same.
However, in Part d, accumulated E&P as of October 1 is $40,000 ($100,000
beginning balance - $60,000 current deficit as of October 1) so that $40,000 of the distribution is
a dividend.
Allocation of the current E&P deficit to the pre-October 1 period is accomplished by
multiplying $80,000 times 9/12ths.
(Alternatively, the actual number of days could be used, in
which case the accumulated E&P deficit would be $59,836 ($80,000 x 273/365) in a non leap-
year tax year.)
Of the remaining $60,000, $25,000 is a return of capital that reduces the
shareholder's stock basis to zero, and the remaining $35,000 is a capital gain.
pp. C:4-6 through
C:4-8.
C:-
a.
The distribution amount is the FMV of all property received.
If the shareholder
assumes or acquires a liability in connection with the distribution, it reduces the amount of the
distribution (but not below zero).
C:4-