In a proportionate nonliquidating distribution of a capital asset Emgo videocha
TYPICAL MISCONCEPTION Because E&P is such an important concept in many corporate transactions, one would assume that corporations know exactly what their E&P is.
However, many corporations do not compute their E&P on a regular basis.
It discusses the tax consequences of the following types of distributions: Distributions of cash or other property where the shareholder does not surrender any stock Distributions of stock or rights to acquire stock of the distributing corporation Distributions of property in exchange for the corporation s own stock (i.e., stock redemptions) Chapter C:6 discusses liquidating distributions, and Chapter C:7 discusses distributions associated with corporate reorganizations.
NONLIQUIDATING DISTRIBUTIONS IN GENERAL SELF-STUDY QUESTION How does a shareholder classify a distribution for tax purposes?
If the stock is a capital asset in the shareholder s hands, the gain is capital in character.
EXAMPLE C:4-1 On March 1, Gamma Corporation distributes ,000 in cash to each of its two equal shareholders, Ellen and Bob.
c Any amount that exceeds the shareholder s basis in his or her stock.
At the time of the distribution, Gamma s E&P is ,000.
Ellen s basis in her stock is ,000, and Bob s basis in his stock is ,000.
ANSWER Distributions are treated as follows: (1) dividends to the extent of corporate E&P, (2) return of capital to the extent of the shareholder s stock basis, and (3) gain from the sale of stock.
When a corporation makes a nonliquidating distribution to a shareholder, the shareholder must answer the following three questions: What is the amount of the distribution?