Distributions Received by Shareholder from Corporation in Which S/H Owns Stock
Sec. 301(c)—distributions are taxable to shareholder as dividend income to the extent of distributing corporation’s “earnings & profits” (E&P).
Distributions in excess of E&P reduce tax basis of recipient in stock of distributing corporation.
Regs. §1.1502-13(f)—Dividends received from another member of consolidated group are not taxable (and thus reduce basis in stock of distributing corporation).
E&P are essentially equal to taxable income adjusted for :
Nontaxable income (e.g., dividends received deduction, section 199 deduction, dividends received from another member of consolidated group);
Nondeductible losses and expenditures (e.g., fines & penalties, 50% of meals & entertainment, income tax expense);
Excess losses and expenditures (e.g., capital losses in excess of capital gains, charitable contributions in excess of 10% limitation, net operating losses);
Methodological adjustments (depreciation methods, etc.).
E&P is computed on cumulative basis (like retained earnings) and is reduced by distributions deemed to come from E&P (also like retained earnings).
E&P of consolidated group is aggregated for purposes of classifying distributions from parent to ultimate shareholders.
Corporate Distribution of Property Other than Cash
Sec. 301(b)—amount of distribution is equal to net FMV of property received.
Sec. 301(d)—shareholder takes basis in distributed property equal to FMV.
Sec. 311(a)—no gain or loss recognized by corporation on distribution with respect to its stock.
Sec. 311(b)—Exception: distributing corporation recognizes gain on distribution of appreciated property as if such property were sold and the proceeds distributed to shareholder(s)
Regs. §1502-13—distributions between members of a consolidated group:
Sec. 311(a) does not apply—distribution of property to another member of consolidated group is treated as a sale, followed by distribution of proceeds
corporation recognizes gain or loss on distribution equal to difference between basis and FMV
Recipient takes FMV basis in property received
Gain or loss is not eliminated in consolidation
Sec. 302—Stock redemption triggers capital gain to extent proceeds exceed basis of redeemed shares