This course provides an introduction to the U.S. federal income taxation of corporations and their shareholders. The course focuses on the relevant provisions of Subchapter C of the Internal Revenue Code, as well as related Treasury Regulations and judicial opinions, governing corporate formation, operations, distributions, and liquidation. Practical in-class study problems facilitate self-discovery of technical tax knowledge along with the development of a variety of professional skills and attitudes.
Lesson 5.3.2 Property Distributions: Applications
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來自 University of Illinois at Urbana-Champaign 的課程
Taxation of Business Entities I: Corporations
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Module 5: Corporate Non-Liquidating Distributions
In this module, you will learn about corporate non-liquidating distributions. First, earnings and profits (E&P) will be discussed, and you will learn how to calculate E&P. Next, you will analyze the treatment of cash distributions followed by property distributions. You will then cover the treatment of stock distributions. Finally, treatment of constructive dividends and qualified dividends will be explored.
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Michael P Donohoe, PhD, CPAAssociate Professor of Accountancy and PwC Faculty Fellow
Department of Accountancy, Gies College of Business
Let's now apply the concepts of property distributions to Sunchaser Shakery.
Nicholas says an $8000 basis and
a 100 percent of the stock of Sunchaser Shakery Corporation.
At the beginning of the current year,
Sunchaser had $25,000 of accumulated E&P.
In part A, we want to know what are the tax effects
of a distribution of inventory worth $20,000,
a basis of $11,000,
if Sunchaser has no current E&P.
So the issue in this particular problem is that we have
a non-liquidating distribution of built-in gain property,
which you learned recently,
can trigger gain recognition to
the extent that the fair market value exceeds adjusted basis.
In other words, calculate it the same way we calculate all gains.
So to look more closely here,
we're told that the inventory has a fair market value of $20,000,
and it's adjusted basis was $11,000.
So, in other words, there's a built-in gain in this property being distributed of $9000.
As you learned in the concepts discussion,
this gain must be recognized by the corporation.
Because it's recognized, it has an immediate effect on current E&P,
meaning at the time of the distribution,
the gain is simultaneously recognized,
as well as that gain increases E&P,
meaning there's $9000 more of a gain
economically available for distribution to shareholders out of E&P.
So as soon as this distribution is made,
current E&P, which there was none prior, is now $9000,
and we're told accumulated E&P at the beginning of the year was $25,000,
meaning there's $34,000 available on hand for distribution.
So the distribution itself,
the fair market value of the inventory was $20,000.
We're going to focus on the fair market value of it of
$20,000 because this is appreciated property.
As you learned in the concepts discussion,
if it were depreciated property,
we would use adjusted basis here to value the distribution.
So all distributions come out of E&P first before we get to any of the other components.
So of the $20,000,
the first $9000 is deemed to have come from current E&P.
The remaining $11,000 is deemed to have come from accumulated E&P.
So the entire amount of the distribution in
this particular setting is a taxable dividend.
In addition, the shareholder, Nicholas,
will take a fair market value basis in the inventory received because
this was a taxable transaction, so $20,000.
In that year-end, Sunchaser will have
accumulated E&P available to roll into the next year.
So E&P was $25,000 accumulated at the end of the last year.
We said of the $20,000 distribution,
$11,000 came out of accumulated E&P, meaning $14,000 remains.
In part B, we want to know what are the tax effects of
a distribution of inventory worth $20,000,
basis of $11,000, if this time,
Sunchaser has no current or accumulated E&P on hand.
So, again, we still have a distribution of built-in gain property.
Because the fair market value is still $20,000,
the adjusted basis is still $11,000.
So there's still this $9000 built-in gain,
which as before, must be recognized by the corporation.
Because it's recognized by the corporation,
it's economic in a sense.
It creates funds that are technically available,
at least from a conceptual standpoint,
for distribution to shareholders.
Current E&P increases by this $9000.
However, in this particular problem,
we're told that Sunchaser has no current or accumulated E&P.
So current E&P, as a result of this distribution,
will go from zero to $9000.
In other words, there's now $9000 of current E&P available for distribution.
So to determine the tax effects of this distribution of appreciated property,
again, we focus on the fair market value because it's appreciated.
The first $9000 of this $20,000 distribution
is deemed to have come from this new current E&P balance.
So $9000 is a taxable dividend because it's to the extent of current E&P.
We still have quite a bit left to characterize.
So the remaining amount $11,000,
goes to the next stage,
which is a return of capital or basis reduction.
And we're told Nicholas has an $8,000 basis in his shares of stock.
So we'll retake his $8,000 basis and reduce it by as much as we can,
which in this case is the full $800,
leaving him with zero basis now in his shares.
And then the $3000 that remains will be treated as a gain on the sale of stock.
And we have accounted for the full $20,000 of this distribution.
What's important to notice here is that Section 311 B1 produces sufficient E&P to
characterize the distribution as
dividends to the extent of the appreciated value of the inventory.
In other words, the built-in gain that's here, the $9000,
is automatically treated as a taxable dividend because
that $9000 gain recognition immediately increases current E&P.
It's rather clever. Overall, this tax treatment
essentially produces the same effect as if Sunchaser
sold the inventory and then distributed cash equal
to the fair market value of the property to shareholders.
Sunchaser Shakery Corporation distributed a building to its only shareholder, Nicholas.
The building was worth $189,000 with a basis of
$154,000 and subject to a $245,000-liability that Nicholas assumed.
How much gain, if any, does Sunchaser recognize?
Well, here we have a distribution of property that is subject to a liability,
and we know that creates some unique situations.
So let's just kind of quickly summarize the concept here before we get into the problem.
So the key thing that we need to note is that if distributed property is subject to
a liability that is an excess of basis,
to determine the gain,
the fair market value of the property
is treated as being
not less than the amount of the liability.
It's a very simple concept,
but it's almost harder to put it into words than to actually do it.
So if we just write down the three components,
here we see that the fair market value of the property was $189,000.
It had an adjusted basis of $154,000,
but it's subject to this liability or debt,
the mortgage, of $245,000.
And so we can easily see that the debt exceeds the liability amount.
So that means when we go to figure out the gain on this property,
we have to use the debt as the fair market value because the debt exceeds adjusted basis.
In other words, the amount realized will be $245,000.
Reason being someone else is on the hook for this amount.
In other words, it's worth $245,000 and a sense to somebody.
The adjusted basis is $154,000.
And so we calculate a realized gain of $91,000.
Sunchaser Shakery Corporation distributed a building to its only shareholder, Nicholas.
The building was worth $20,000 with a basis of
$30,000 and subject to a $6000 liability that Nicholas assumed.
Before considering this distribution,
Sunchaser had current E&P of $30,000 and accumulated E&P of zero.
And our goal is to compute current E&P after the property distribution.
So let's take a look at what we have here.
We have property with a fair market value of $20,000.
It has an adjusted basis of $30,000.
So we can clearly see that this property has actually depreciated in value.
However, this situation is different from the prior problems that we examined,
which were appreciated property.
So here we have no loss recognition.
The corporation is not allowed to recognize this loss.
They only are required to recognize gains.
So no loss recognition.
Thus, this particular $10,000 loss has no effect on E&P.
Much like before or unlike before,
the $9000 of gain and the prior problem immediately increased the E&P.
Here, this $10,000 loss does not affect E&P.
However, we still have to account for E&P when
trying to determine the tax effects of this particular distribution.
The loss on the distribution of property does not affect E&P,
but the distribution of property does affect E&P.
So decrease E&P by the adjusted basis of
the distributed property, net of liabilities.
And this is because it's depreciated property.
So we're told we have $30,000 of current E&P available,
and we're now going to reduce this by the adjusted basis of the property distributed,
which is 30,000, net of liabilities,
which we're told were $6000.
So it will reduce current E&P by this net amount of $24,000,
leaving us with our answer of $6000 of E&P after the distribution.
