1. §316 – Dividend Defined
Distribution out of E & P accumulated after , or to the extent of current E & P.
Portion not taxed as a dividend is Return of Capital to extent of basis.
Potion in excess of basis is capital gain.

2. Sec. 312 – Earning and Profits Undefined
E & P similar to “retained earnings” but not in all aspects, such as stock dividend does not decrease.
E & P represents Corporations economic ability to pay dividends without impairing capital.
In practice, E & P almost always represents a costly debacle

3. Increases to E & P Muni interest Life insurance proceeds FIT refunds
DRD
80% of 179
Deferred gain if installment method used

4. Decreases to E & P Excess capital losses FIT Fines and Penalties
50% M & E
Life insurance premiums
Nondeductible contributions

5. Stupid E & P Adjustments
Adjustment to straight-line depreciation
§179 over 5 years
Basically, all other timing differences
This is just my opinion

6. Allocating E & P to Distributions
Current E & P is allocated pro-rata
Accumulated is allocated chronological
If deficit in accumulated E & P and positive in current, then dividends to extent of current E & P
If deficit in current and positive in accumulated, then dividend to extent of net positive balance
Assumption is that current E & P is sufficient

7. Property Dividends Amount distributed is Fair Market Value
Amount distributed is decreased by any liabilities
§311(b); gain, but not loss recognized by corporation

8. Constructive Dividends
Usually arise in closely-held corporation
IRS very good on this issue, easy money
Examples include personal use of corporate-owned property, bargain sales, satisfaction of personal debt, and loans without bona fide business purpose (most common)

9. Stock Dividends §305(b) General rule is tax free
Taxable if in lieu of cash or property
Disproportionate distributions taxable
Some common, some preferred taxable
Convertible preferred that results in disproportionality

10. Stock Redemptions §302(b) and §303
Sale or Exchange treatment is generally desirable
Not essentially equivalent §302(b)(1)
Substantially disproportionate §302(b)(2)
Complete termination
Redemption to pay “death taxes”

11. Attribution, §318 Spouse, children, grandchildren and parents
By partnership proportionately by partners
By estate or trust proportionately by beneficiaries
Proportionately by shareholder owning 50% or more of corporation

12. U.S. vs Davis , 90 S.Ct. 1041, 3/23/70,
Not essentially equivalent test
Immaterial if redemption had a business purpose
§318 applies
Must result in “meaningful reduction” of shareholder’s interest

13. Redemption after Termination
§302(b) complete termination
Shareholder may not retain any interest
May not acquire any interest within 10 years
See §302(c)(2)(B)

14. Redemption to pay death taxes
Corporate stock is > 35% of gross estate
2 or more corps work if each is > 20%
Applies to extent of death taxes and funeral and admin expense