9 - 3 Calculating E&P Starts with taxable income, but is subject to positive and negative adjustments 1) DRD, loss carryovers, and tax-exempt income are added back 2) Federal income taxes paid are deducted 3) Charitable contributions are deducted without regard to the 10% limit 4) Only 20% of Section 179 expensing allowed 5) Also deductible for E&P are life insurance premiums on key employees, capital losses in excess of capital gains, nondeductible expenses related to tax-exempt income, disallowed losses on related party sales, and nondeductible fines
9 - 3 Applying E&P to Distributions Current earnings and profits (CE&P) Current year’s taxable income (as adjusted) Accumulated earnings and profits (AE&P) Accumulations of CE&P for all prior years that have not been distributed as dividends Dividends are first paid from CE&P then AE&P Dividends in excess of E&P Tax free return of capital to extent of shareholder’s stock basis (reduce basis) If shareholder’s basis is reduced to zero, excess distribution is capital gain
9 - 3 Property Distributions Property distributions – corporation recognizes gain on distribution of appreciated property (but not loss) Value of distribution is net FMV (net of any liabilities assumed) and basis to shareholder is FMV Like cash dividends, property dividends taxable only to extent of E&P
9 - 3 Stock Dividends and Rights Stock dividend – distribution of stock that gives shareholder a greater number of shares Nontaxable if proportionate distribution (unless given choice of cash or stock) Shareholder allocates basis among all shares of stock Stock rights – the right to purchase additional stock at a set price If value of rights is less than 15% of value of stock, then no basis must be allocated to rights
9 - 3 Redemptions Redemption – a repurchase of stock from a shareholder by the issuing corporation that may result in either sale or dividend treatment to the redeeming shareholder Sale treatment allowed if The redemption is substantially disproportionate (ownership after redemption is less than 50% of shares and less than 80% of ownership before redemption) or Shareholder completely terminates interest in the corporation
9 - 3 Redemptions If treated as a sale, shareholder recognizes capital gain (or loss) on the difference between the proceeds received and the basis of the stock surrendered If not a sale, the amount the shareholder receives is taxed as a dividend to the extent of the corporation’s E&P
9 - 3 Redemptions Attribution rules apply in determining ownership Family attribution – includes stock owned by spouse, parent, child, grandchild Entity to owner – attributed proportionately from partnership to partners, from estate or trust to beneficiaries, from corporation to 50%-or-greater shareholders Owner to entity – attributed from partner to partnership, from beneficiary to estate or trust, from 50%-or-greater shareholder to corporation
9 - 3 Partial Liquidations Partial liquidation – the significant reduction in a corporation’s operations or a termination of one of its qualifying businesses with a distribution of property or cash to its shareholders
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- Spring '12
- Dividend, Taxation in the United States, Corporation