Corporate Tax Midterm
In regards to XYZ distributing inventory (FMV $20,000, basis $11,000) to Zane, XYZ
recognizes $9,000 of gain on distribution of inventory according to § 311(b). Section 311(b)
states that if the FMV of a property exceeds adjusted basis (in the hands of the distributing
corporation (XYZ)), then a gain shall be recognized to the distributing corporation (XYZ) as if
such property were sold to the distributee at its FMV.
In addition, XYZ increases Current E&P
to $9,000 [§ 312(b)(1)]. For purposes of § 301(b), the amount of any distribution shall be the
amount of money received, plus the fair market value of the other property received.
the amount of distribution to Zane is $20k, the FMV of inventory. This $20,000 ($9,000 from
Current E&P and $11,000 from Accumulated E&P) is a dividend which should be recognized in
Zane’s overall gross income [§301 (c)(1)].
Zane’s basis for his newly acquired inventory, will
now be the FMV of the product received §301(d).
Accumulated E&P at the beginning of next
year is $14,000 ($25,000 balance at beginning of year + $9,000 current E&P for gain recognized
[§ 312(b)(1)] - $20,000 value of inventory distributed [§ 312(b)(2)]).
This problem is similar to A except that XYZ has no current or accumulated E&P before the
In both cases, XYZ recognizes $9,000 of gain on distribution of inventory [§
311(b)], increases Current E&P to $9,000 [§ 312(b)(1)], and distributes $20,000, the FMV of
inventory, to Zane [§ 301(b)].
According to §301 (c)(1), $9,000 is a dividend (the extent of
The $8,000 initial basis of the stock purchased by Zane in XYZ corporation must
be applied to his basis [§301(c)(2)] and the amount in excess of basis, which is $3,000, shall be
treated as a capital gain from the exchange of property §301(c)(3).
Through this all, Zane takes
the $20,000 FMV basis in inventory [§ 301(d)]. Accumulated E&P at the beginning of next year