4.7 Distributions from Corporation

1. Ordinary (Current/Nonliquidating) Distribution

1) Dividends defined
Current earnings and profits, accumulated  earnings and profits

2) Amount of distributions (to the shareholder): FMV

3) Three categories of distributions
(a)  earnings and profits: dividend - taxable
(b) Stock basis: the return of capital - nontaxable (reduces stock basis)
(c) Capital gain distribution - taxable

4) Order of distribution allocation
Current earnings and profits first and then accumulated earnings and profits

5) Matching cash dividends to source
(1) Current earnings and profits are allocated on a pro-rata basis for each distribution.
(2) Accumulated earnings and profits are applied in chronological order

6) Shareholder's Taxable Amount: FMV
* Corporation shareholder: DRD

7) Stock dividends: generally not taxable

8) Constructive dividends
(a) Excessive salary paid to shareholder-employees
(b) Sale of assets below fair market value
(c) Interest-free loans or "loans" to shareholders where no intent to repay

9) Distribution of appreciated property (taxable on the corporation)
The corporation recognizes gain (but not loss) as if the property had been sold for its FMV

2. Stock Redemptions

1) Exchange (sale): capital gain or loss
(2) The redemption is substantially disproportionate or
(3) All of the shareholder's stock is redeemed.

2) Dividend: ordinary income

3. Complete (Liquidating) Distribution

Shareholder: taxable - capital gain/loss

Corporation recognize gain or loss as if the distributed property were sold to the distributee for FMV (taxable event)

4. Liquidation of Subsidiary

No gain/loss is recognized when the parent owns at least 80%