1. Anita Sayyed, Thomas Labelle, Sravya Boddu, Brian Reynolds
Chapter 5: Taxing Corporate Distributions

2. Learning Objectives (Review)
• LO. 1: Explain the role that earnings and profits play in
determining the tax treatment of distributions
• LO.3: Determine taxable dividends paid during the year by
correctly allocating current and accumulated E & P to
corporate distributions

3. RECAP
Accumulated Current
E&P E&P
•Current 1st pro rata, accumulated
chronological as necessary
•Netted at the date of distribution
•Do NOT net! Dividend income to the
extent of current positive balance
•No dividend income, results in return
of capital or capital gain

4. Learning Objectives (New)
LO.4: Describe the tax treatment of dividends for individual
shareholders
LO.5: Evaluate the tax impact of property dividends by
computing the shareholder’s dividend income, basis in the
property received, and the effect on the distributing
corporation's E & P and taxable income

5. LO 4: Tax Treatment of Dividends
Corporations:
Dividend income for corporations is ordinary income and they
receive dividend received deductions.
• Ownership less than 20% 70% exempt
• Ownership 20%-50% 80% exempt
• Ownership more than 50% 100% exempt

6. Individuals:
Individuals are taxed at lower preferential rates for qualified
dividends.
• Individuals paying tax @ 10-15% 0%
• Individuals paying tax @ 39.6% 20%
• For any other tax bracket 15%
LO 4: Tax Treatment of Dividends

7. LO 4: Tax Treatment of Dividends
Qualified dividends:
• Paid by domestic or qualified /approved corp.
• Short or long positions do NOT qualify
• Stock held more than 60 days during the 121 days period
▫ 60 days begins before the before ex-dividend date
▫Ex-Dividend date: 2 days before the declaration of dividend
• Example 2

8. LO 5: Property Dividends
Reasons for Property Distribution:
• Shareholders may want a particular property
• Company low on cash reserves may want to distribute dividends to shareholders
(Property distributions are taxed on the same rates as cash dividend)
EFFECT ON SHAREHOLDER:
• The amount distributed is the FMV of the property distributed reduced by any
liability that the property is subject to or any liability of the corporation that the
shareholder assumes.
• Example 3

9. LO 5: Property Dividends
EFFECT on CORPORATION:
• The distribution of property is treated as sale/exchange of
property at its FMV. Corporations recognize gain on
distribution (FMV-Basis)
• If a loss is realized it will not be recognized on the tax return.
(to avoid negative dividend)
• Example 4

10. LO 5: Property Dividends
EFFECT ON SHAREHOLDER:
• Distribution covered by E&P is treated as dividend and the
excess is treated as return of capital. The amount of return
greater than shareholder’s basis is taxed as capital gain
• The FMV of the property received as dividend will be the
basis of the property for the shareholder.
• Example 5

11. LO 5: Property Dividends
• If the liability assumed is greater than the corporation’s basis
in the property, The FMV is deemed not to be less than the
liability. The shareholder’s basis in the property will be the
FMV of the liability
• Example 6

12. LO 5: Property Dividends
• Corporate distributions reduce the E&P by the amount of
money distributed. (assuming enough basis)
Or by greater of FMV or adjusted basis of property
distributed
Less: the amount of any liability assumed
• E&P will increase by any gain recognized on distribution of
property
• Examples 7, 8, 9

13. LO 5: Property Dividends
• A distribution of cash or property cannot generate a
deficit or add to a deficit in E&P. Deficits can arise
only through corporate losses.
• Example 10

14. RECAP
EFFECT ON CORPORATION EFFECT ON SHAREHOLDER
FMV > Basis Distribution=FMV
Gain is recognized
Distribution=FMV
Basis=FMV
FMV < Basis Distribution= Basis
loss is not recognized
Distribution =FMV
Basis=FMV
FMV > Basis
Liability is assumed
Distribution=FMV - Liab assumed
Gain is recognized
Distribution=FMV-Liability
Basis=FMV
Liability>FMV deemed FMV=liability assumed
Distribution = greater of FMV or Basis
Gain if any is recognized
deemed FMV=Liability
Distribution=FMV-Liability
Basis=FMV