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?