Distributions to Shareholders in Terms of Timing, E&P & Dividends, and Property & Stock
Distributions to Shareholders – Timing
(1) XYZ Corporation is a calendar-year corporation. Ann and Paul each own 50% of the corporation’s stock. Ann’s adjusted basis in her XYZ stock is 7,800 and Paul’s adjusted basis in his stock is $4,300. During the year 2019, XYZ makes the following cash distributions split equally between Ann and Paul:
April 30 $15,000
October 31 $10,000
What is the amount, character and source of each section 301 distribution to Ann and Paul under each of the following assumptions?
(a) Accumulated Earnings and Profits as of 1/1/19 of $-0-. Current Earnings and Profits for 2019 of $16,000 all of which is attributable to the period May 1 through December 31.
(b) Accumulated Earnings and Profits as of 1/1/19 of $12,000. Current Earnings and Profits for 2019 of $8,000.
(c) Accumulated Earnings and Profits as of 1/1/19 of negative $15,000. Current Earnings and Profits for 2019 of $22,000.
(2) QRS Corporation is a calendar-year corporation. Ann and Paul each own 50% of the corporation’s stock. Ann’s adjusted basis in her QRS stock is 7,800 and Paul’s adjusted basis in his stock is $4,300. QRS Earnings and Profits as of 1/1/19 of $28,000. For the year 2019, QRS had negative Current Earnings and Profits of $18,000. What is the amount, character and source of each section 301 distribution to Ann & Paul under the following assumptions?
(a) During the year 2019, QRS makes the following cash distributions split equally between Ann and Paul:
April 30 $15,000
October 31 $10,000
(b) During the year 2019, QRS makes the following cash distributions split equally between Ann and Paul:
January 31 $15,000
March 31 $10,000
(c) During the year 2019, QRS makes the following cash distributions split equally between Ann and Paul:
October 31 $15,000
December 31 $10,000
Distributions to Shareholders
E&P and Constructive Dividends
(3) Fortune, Inc. uses the accrual method of accounting. What is Fortune’s earnings and profits as of January 1, 2020, assuming its opening 2019 E&P was $50,000, it distributed $29,000 to its shareholders in 2019, its 2019 taxable income was equal to $25,000 and that it has the following items of income and expense for the year 2019:
Net operating loss carryover 2,500 …………………………….… 2,500
§ 243 dividend received exclusion (5% interest in stock of payor).. 8,000
Contributions in excess of 10% corporate limitation ……………... 1,000
Federal Income tax for TYE 12/31/19 .............................................. 2,100
Excess of capital losses over capital gains ........................................ 1,500
Interest Income from Tax-exempt municipal bond ........................... 4,300
NYC moving violation and parking tickets ……………………….. 7.400
Current year Section 179 deduction ...…………………………....... 9,000
Distributions to Shareholders – Property & Stock
(4) DEF Corporation distributes a building to Jones, an individual and fifty (50) percent shareholder. The building has a FMV of $50,000 and an adjusted basis of $32,000. Without considering the distribution of the building to Jones, DEF Corporation had earnings and profits of $26,500. Jones adjusted basis in his interest in DEF Corporation was equal to $15,000.
(a) What is the amount of the section 301 distribution to Jones?
(b) What is Jones' basis in the building following its distribution to Jones?
(c) What is the amount of gain recognized by DEF Corporation as a result of the distribution of the building to Jones?
(d) What is the character of the distribution to Jones and what is the amount of DEF’s earnings and profits following the distribution?
(5) XYZ Corporation distributes a building to Smith, an individual and fifty (50) percent shareholder. The building has a FMV of $50,000 and an adjusted basis of $68,000. Without considering the distribution of the building to Smith, XYZ Corporation had earnings and profits of $26,500. Smith adjusted basis in his interest in XYZ Corporation was equal to $15,000.
(a) What is the amount of the section 301 distribution to Smith?
(b) What is Smith’s basis in the building following its distribution to Smith?
(c) What is the amount of gain recognized by XYZ Corporation as a result of the distribution of the building to Smith?
(d) What is the character of the distribution to Smith and what is the amount of XYZ’s earnings and profits following the distribution?
(6) ABC Corporation distributes a building to Green, an individual and fifty (50) percent shareholder. The building has a FMV of $50,000 and an adjusted basis of $32,000. The building was encumbered by a $20,000 liability at the time of its distribution to Green. Without considering the distribution of the building to Green, ABC Corporation had earnings and profits of $26,500. Green adjusted basis in his interest in ABC Corporation was equal to $15,000.
(a) What is the amount of the section 301 distribution to Green?
(b) What is Green’s basis in the building following its distribution to Green?
(c) What is the amount of gain recognized by ABC Corporation as a result of the distribution of the building to Green?
(d) What is the character of the distribution to Green and what is the amount of ABC’s earnings and profits following the distribution?
(7) Able is a shareholder in the QRS Corp. QRS has accumulated earnings and profits of $200,000, and current earnings and profits for the year 2019 equal to $300,000. What are the tax consequences to Able if QRS on December 15, 2019 declares a dividend equal to $250,000 payable in equal amounts of $50,000 to Able and the other four shareholders of QRS Corp. on December 27, 2019, if:
(a) The amount declared is payable in the common stock of QRS?
(b) Able and his fellow shareholders have the option of having the amount declared paid either in cash or QRS stock, and they all choose to receive additional stock?
(c) Able can receive only additional QRS stock for his share of the amount declared, and the other four shareholders can receive only cash for their share?
Distributions to Shareholders
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Distributions to Shareholders
This discussion will explore the concept of distributions to shareholders in terms of timing, E&P & constructive dividends, and property & stock. The solutions to questions 1-7 are presented below.
1 XYZ Corporation
Distributions as at April 30, 2019 are $15,000 and October 31, 2019 are $10,000. Ann and Paul each own 50% of the stock.
a). Tables 1.0 and 1.1 below show the source of distribution and amount of distribution, respectively, for Accumulated Earnings and Profits as of 1/1/19 of $-0- and Current E&P for 2019 of $16,000 attributable to May 1-December 31.
Table 1.0
Source of Distribution
Current E & P
Accumulated E & P
Return of Capital
April 30 distribution
$15,000
$0
$0
$15,000
October 31 distribution
$10,000
$10,000
$0
$0
In the calculation of the April 30 distribution, the amount of the Current E&P is not included since the E&P is attributable to the period from May 1 and the Accumulated E&P is $-0-. The Current E&P is included in the calculation of the October 31 distribution. The Current E&P is $10,000, which is less than the Current E&P, and as such, no amount is transferred to Return of Capital.
Table 1.1
Shareholder
Ann
Paul
$
$
April 30 distribution
Dividend Income
From Current E & P
-
-
From Accumulated E & P
-
-
Return of Capital
7,500
7,500
October 31 distribution
Dividend Income
From Current E & P
5,000
5,000
From Accumulated E & P
-
-
Return of Capital
-
-
Total Distribution
12,500
12,500
Total Dividend Income
5,000
5,000
Non-taxable Return of Capital
7,500
7,500
Stock Basis
7,800
4,300
Balance of Stock Basis
300
-
Taxable Gain
-
3,200
Ann and Paul equally share the Current E & P of $10,000 for the October 31 distribution. The return of capital of $15,000 for the October 31 distribution is also equally shared and reduces the shareholders’ stock basis to $5,300 and $-0-, respectively, creating a taxable gain of $3,200 for Paul.
b). Tables 1.2 and 1.3 below show the source of distribution and amount of distribution, respectively, for Accumulated Earnings and Profits as of 1/1/19 of $12,000 and the Current E&P for 2019 of $8,000.
Table 1.2
Source of Distribution
Current E & P
Accumulated E & P
Return of Capital
April 30 distribution
$15,000
$4,000
$11,000
$0
October 31 distribution
$10,000
$4,000
$1,000
$5,000
In the calculation of the April 30 distribution, the amount of the Current E&P is $4,000, being half of the Current E&P of $8,000. The Accumulated E&P is $11,000 out of the amount of $12,000. There’s no Return of Capital since the Current E&P and Accumulated E&P are sufficient to cover the distribution. The balance of $1,000 is carried over to the next distribution. In the calculation of the October 31 distribution, the Current E&P is the balance of the Current E&P of $4,000, and the balance of Accumulated E&P of $1,000 is applied to leave a Return of Capital of $5,000.
Table 1.3
Shareholder
Ann
Paul
$
$
April 30 distribution
Dividend Income
From Current E & P
2,000
2,000
From Accumulated E & P
5,500
5,500
Return of Capital
-
-
October 31 distribution
Dividend Income
From Current E & P
2,000
2,000
From Accumulated E & P
500
500
Return of Capital
2,500
2,500
Total Distribution
12,500
12,500
Total Dividend Income
10,000
10,000
Non-taxable Return of Capital
2,500
2,500
Stock Basis
7,800
4,300
Balance of Stock Basis
5,300
1,800
Ann and Paul equally share the Current E & P of $4,000 for the April 30 distribution and $4,000 for the October 31 distribution, in addition to the Accumulated E & P of $11,000 for April 30 distribution and $1,000 for the October 31 distribution. The return of capital of $5,000 for the October 31 distribution is also equally shared and reduces the shareholders’ stock basis to $5,300 and $1,800, respectively.
c). Tables 1.4 and 1.5 below show the source of distribution and amount of distribution, respectively, for Accumulated Earnings and Profits as of 1/1/19 of $15,000 and the Current E&P for 2019 of $22,000.
Table 1.4
Source of Distribution
Current E & P
Accumulated E & P
Return of Capital
April 30 distribution
$15,000
$11,000
$0
$4,000
October 31 distribution
$10,000
$10,000
$0
$0
In the calculation of the April 30 distribution, the amount of the Current E&P is $1,000, being half of the Current E&P of $22,000. The Accumulated E&P is -$15,000 is not considered. The Return of Capital is $4,000 since the Current E&P is insufficient to cover the distribution. In the calculation of the October 31 distribution, the Current E&P is $10,000 out of the ratable Current E&P of $11,000, sufficient to cover the distribution. There is no Return of Capital.
Table 1.5
Shareholder
Ann
Paul
$
$
April 30 distribution
Dividend Income
From Current E & P
5,500
5,500
From Accumulated E & P
-
-
Return of Capital
2,000
2,000
October 31 distribution
Dividend Income
From Current E & P
5,000
5,000
From Accumulated E & P
-
-
Return of Capital
-
-
Total Distribution
12,500
12,500
Total Dividend Income
10,500
10,500
Non-taxable Return of Capital
2,000
2,000
Stock Basis
7,800
4,300
Balance of Stock Basis
5,800
2,300
Ann and Paul equally share the Current E & P of $11,000 for the April 30 distribution and $10,000 for the October 31 distribution. The return of capital of $4,000 for the April 30 distribution is also equally shared and reduces the shareholders’ stock basis to $5,800 and $2,300, respectively.
2 QRS Corporation
The E&P as of 1/1/19 is $28,000, and the Current E&P for 2019 is -$18,000. The Accumulated E&P and Current E&P are not netted.
a). Table 2.0 and 2.1 below show the source of distribution and amount of distribution, respectively, for Distributions of $15,000 as of April 30, 2019, and $10,000 as of October 31, 2019.
Table 2.0
Source of Distribution
Current E & P
Accumulated E & P
Return of Capital
January 1, 2019
$28,000
April 30 (⅓ of Current E&P deficit)
-$6,000
$22,000
April 30 distribution
$15,000
$15,000
$0
$0
May 1, 2019
$0
$7,000
October 31 (⅚ of Current E&P deficit)
-$15,000
-$8,000
October 31 distribution
$10,000
$0
$0
$8,000
Taxable Gain
$2,000
In the calculation of the April 30 distribution, the ratable amount of the Current E&P deficit is -$6,000 (Current E&P deficit, $18,000 X ⅓). The amount then reduces the Accumulated E&P to $22,000 which is sufficient to pay the distribution, leaving an Accumulated E&P balance of $7,000. The October 31 distribution calculation gives a ratable amount of the Current E&P deficit as -$15,000 (Current E&P deficit, $18,000 X ⅚), which brings the Accumulated E&P to $-0- by the Return of Capital of $8,000 to the extent of the total stock basis of $12,100 ($7,800 + $4,300). The difference is a Taxable Gain of $2,000 ($10,000 - $8,000).
Table 2.1
Shareholder
Ann
Paul
$
$
April 30 distribution
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