Chapter 4 corporate nonliquidating distributions
The additional ,000 that each shareholder receives is first treated as a return of capital and then as a capital gain.
The following table summarizes the calculations: Corporate Nonliquidating Distributions Corporations 4-3 Ellen Bob Total Distribution ,000 ,000 0,000 Dividend income a (40,000) (40,000) (80,000) Remaining distribution ,000 ,000 $ 40,000 Return of capital b (20,000) (10,000) (30,000) Capital gain c $ 0 ,000 $ 10,000 a Smaller of E&P allocable to the distribution or the amount of the distribution.
A brief summary of the rules for determining the taxability of a distribution follows, along with a simple example.
Section 301 requires a shareholder to include in gross income the amount of any corporate distribution to the extent it is a dividend.
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EARNINGS AND PROFITS (E&P) The term E&P is not specifically defined in the IRC.
c Any amount that exceeds the shareholder s basis in his or her stock.Earnings and profits are discussed in the next section of this chapter.Section 317(a) defines property broadly to include money, securities, and any other property except stock or stock rights of the distributing corporation.Shareholders who receive such distributions might recognize ordinary income, capital gain, or no taxable income at all.The distributing corporation may or may not be required to recognize gain or loss when making the distribution.
Qualified dividends received by a noncorporate shareholder in 2003 through 2010 are subject to a maximum 15% tax rate.