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Nonliquidating Distributions Outline

Law Outlines > Corporate Tax (Duke Zelenak) Outlines

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Nonliquidating Distributions I.

II. III.

Section 316(a) defines a dividend as any distribution of property made by a corporation to its shareholders out of accumulated earnings and profits, or current earnings and profits. a. 301(c)(1) when a corporation makes distribution, first treated as dividend to the extent of E&P. (taxed at capital gain rate, 15% or 20%, cannot be deducted by capital loss) b. 302(c)(2) if it exceeds E&P, then a tax-free recovery of SH's stock basis. (0%) c. 301(c)(3) if it still exceeds basis, treated as capital gain. (actual capital gain, taxed at capital gain rate, 15% or 20%, this can be deducted by capital loss) Earnings and Profits a. Start with taxable income b. Add back certain excluded items i. Municipal interest c. Add back certain deductible items i. Section 243 dividends received deductions d. Subtract certain nondeductible items i. Federal income tax ii. capital losses in excess of capital gains e. Make timing adjustments i. +ACRS- alternative (Alternative depreciation system)

1. Straight line method

2. Use class life Problem on 158: a. taxable income 8,450 i. +: 27.5

1. 20 gross profit

2. 2.5 LTCG

3. 5 dividends (Section 243 - when a corporation receives dividends from another corporation) a. More than 80% of IBM: 100% dividends deduction b. 20%- 80% of IBM: 80% dividends deduction c. Less than 20%: 70% dividends deduction ii. -: 19.05

1. 10.25 salaries

2. 2.8 ACRS

3. 2.5 LTCL only deductible against LTCG

4. 3.5 Section 243 deduction of 70% of dividends b. E&P: 13,450 i. 8450 ii. +3000, SS103 interest iii. +3500, SS243 dividend (70%) iv. -800, Federal income tax v. -2,500, LTCL vi. +1800 ACRS adjustment

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