Corporate Distributions

In: Business and Management

Submitted By nogo
Words 671
Pages 3
This memo is primarily for corporate tax specialists.
The case - see page 11-indicates that you may be asked to explain the tax treatment of distributions of cash or property from TuffPeach to its stockholders (or in the case of an LLC, its members).
We know that one of the disadvantages of a regular corporation is that the earnings are subject to taxation when the corporation earns the profit, and there is another level of taxation when the stockholders receive dividends from the Corporation. This is called double taxation.
The attached document has some key code sections summarized. Those code sections are pretty technical but we will explain them.
Is important to note that you do not have double taxation of corporate earnings, if the corporation does not earn a profit. Therefore, a stockholder does not report dividend income - when receiving money or other property from a corporation that has a deficit in its retained earnings.
A shareholder does report income when receiving cash or other property from a corporation that has “earnings and profits” – which is the tax term for retained earnings.
Section 301 (a) indicates that a distribution of property to a shareholder’s is taxed according to procedure in subsection (c).
Subsection (c) indicates that the amount of a distribution that is a “dividend” is included in income. Section 316 indicates that a dividend means a distribution to shareholders from earnings and profits. Therefore, the shareholder will report dividend income when receiving a distribution from a company that has earnings and profits.
Subsection (c) indicates that the shareholder has a tax-free return of capital (and a reduction in basis of the stock) when receiving cash or other property from a corporation that does not have earnings and profits. In intermediate accounting you probably call this kind of distribution a – liquidating…...

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