Chapter c 4 corporate nonliquidating distributions
15) Current E&P does not include A) tax-exempt interest income. 16) Grant Corporation sells land (a noninventory item) with a basis of ,000 for 0,000. 17) Boxer Corporation buys equipment in January of the current year with a seven-year class life for ,000. A) Section 179 property must be expensed ratably over a five-year period when computing E&P. At the time of the distribution, Dixie’s E&P is ,000 and Sally’s basis in her Dixie stock is ,000. Crossroads has earnings and profits of ,000 and Harley’s basis in her stock is ,000.
In 1984, Congress enacted legislation that required gain recognition for all non-liquidating distributions.Under current law, sections 311(b) and 336(a) of the Code require a corporation that distributes appreciated property to its shareholders to recognize gain determined as if the property were sold to the shareholders for its fair market value.Additionally, section 631 of the Act added section 337(d) to the Code to permit the Secretary to prescribe regulations that are necessary or appropriate to carry out the purposes of the After the enactment of sections 311(b) and 337(d), the Treasury Department and the IRS became aware of transactions in which taxpayers used a partnership to postpone or avoid completely gain generally required to be recognized under section 311(b).To the extent that a distribution is made from the corporation’s earnings and profits, it is taxed to the shareholder as a dividend. The portion of the distribution that is not considered a dividend is applied first to reduce the shareholder’s basis in the corporation’s stock. Any remaining portion is treated as gain from the sale or exchange of property (capital gain). Important Note: If a shareholder assumes a liability or takes property subject to a liability, the amount of the distribution is reduced by the amount of the liability. Special rules also apply at the corporate level. Special rules apply to distributions to a shareholder in exchange for the shareholder’s stock (redemptions).Instead of being treated as dividends, redemptions are treated as a sale or exchange of the stock by the shareholder. The distinction can be important when the long-term capital gains rates (which apply to redemptions) are higher than the tax rates on dividends.