Publication 542 |
2001 Tax Year |
Distributions to Shareholders
This section discusses corporate distributions of money, stock, or
other property to a shareholder with respect to the shareholder's
ownership of stock. However, this section does not discuss the special
rules that apply to the following distributions.
- Distributions in redemption of stock. See section 302 of the
Internal Revenue Code.
- Distributions in complete liquidation of the corporation.
See section 331 of the Internal Revenue Code.
- Distributions in corporate organizations and
reorganizations. See section 351-354 of the Internal Revenue
Code.
- Certain distributions to 20% corporate shareholders. See
section 301(e) of the Internal Revenue Code.
Money or Property Distributions
Most distributions are in money, but they may also be in stock or
other property. For this purpose, "property" generally does not
include stock in the corporation or rights to acquire this stock.
However, see Distributions of Stock or Stock Rights, later.
A corporation generally does not recognize a gain or loss on the
distributions covered by the rules in this section. However, see
Gain from property distributions, later.
Amount distributed.
The amount of a distribution is generally the amount of any money
paid to the shareholder plus the fair market value (FMV) of any
property transferred to the shareholder. However, this amount is
reduced (but not below zero) by the following liabilities.
- Any liability of the corporation the shareholder assumes in
connection with the distribution.
- Any liability to which the property is subject immediately
before, and immediately after, the distribution.
The FMV of any property distributed to a shareholder becomes
the shareholder's basis in that property.
Gain from property distributions.
A corporation will recognize a gain on the distribution of property
to a shareholder if the FMV of the property is more than its adjusted
basis. This is generally the same treatment the corporation would
receive if the property were sold. However, for this purpose, the FMV
of the property is the greater of the following amounts.
- The actual FMV.
- The amount of any liabilities the shareholder assumed in
connection with the distribution of the property.
If the property was depreciable or amortizable, the corporation may
have to treat all or part of the gain as ordinary income from
depreciation recapture. For more information on depreciation recapture
and the sale of business property, see Publication 544.
Distributions of Stock
or Stock Rights
Distributions by a corporation of its own stock are commonly known
as stock dividends. Stock rights (also known as "stock options")
are distributions by a corporation of rights to acquire its stock.
Distributions of stock dividends and stock rights are generally
tax-free to shareholders. However, stock and stock rights are treated
as property under the rules discussed earlier under Money or
Property Distributions if any of the following apply to their
distribution.
- Any shareholder has the choice to receive cash or other
property instead of stock or stock rights.
- The distribution gives cash or other property to some
shareholders and an increase in the percentage interest in the
corporation's assets or earnings and profits to other shareholders.
- The distribution is in convertible preferred stock and has
the same result as in (2).
- The distribution gives preferred stock to some common stock
shareholders and gives common stock to other common stock
shareholders.
- The distribution is on preferred stock. (An increase in the
conversion ratio of convertible preferred stock made solely to take
into account a stock dividend, stock split, or similar event that
would otherwise result in reducing the conversion right is not a
distribution on preferred stock.)
For this purpose, the term "stock" includes rights to
acquire stock and the term "shareholder" includes a holder of
rights or convertible securities.
Constructive stock distributions.
You must treat certain transactions that increase a shareholder's
proportionate interest in the earnings and profits or assets of a
corporation as if they were distributions of stock or stock rights.
These constructive distributions are treated as property if they have
the same result as a distribution described in (2), (3), (4), or (5)
of the above discussion. Constructive distributions are described
later.
This treatment applies to a change in your stock's conversion ratio
or redemption price, a difference between your stock's redemption
price and issue price, a redemption that is not treated as a sale or
exchange of your stock, and any other transaction having a similar
effect on a shareholder's interest in the corporation.
Expenses of issuing a stock dividend.
You cannot deduct the expenses of issuing a stock dividend. These
expenses include printing, postage, cost of advice sheets, fees paid
to transfer agents, and fees for listing on stock exchanges. The
corporation must capitalize these costs.
Constructive Distributions
The following sections discuss transactions that may be treated as
distributions.
Below-market loans.
If a corporation gives a shareholder a loan on which no interest is
charged or on which interest is charged at a rate below the applicable
federal rate, the interest not charged may be treated as a
distribution to the shareholder. For more information, see
Below-Market Loans under Income and Deductions,
earlier.
Corporation cancels shareholder's debt.
If a corporation cancels a shareholder's debt without repayment by
the shareholder, the amount canceled is treated as a distribution to
the shareholder.
Transfers of property to shareholders for less than FMV.
A sale or exchange of property by a corporation to a shareholder
may be treated as a distribution to the shareholder. For a shareholder
who is not a corporation, if the FMV of the property on the date of
the sale or exchange exceeds the price paid by the shareholder, the
excess may be treated as a distribution to the shareholder.
Unreasonable rents.
If a corporation rents property from a shareholder and the rent is
unreasonably more than the shareholder would charge to a stranger for
use of the same property, the excessive part of the rent may be
treated as a distribution to the shareholder. For more information,
see chapter 4 in Publication 535.
Unreasonable salaries.
If a corporation pays an employee who is also a shareholder a
salary that is unreasonably high considering the services actually
performed by the shareholder-employee, the excessive part of the
salary may be treated as a distribution to the shareholder-employee.
For more information, see chapter 2 in Publication 535.
Reporting Dividends and Other Distributions
A corporate distribution to a shareholder is generally treated as a
distribution of earnings and profits. Any part of a distribution from
either current or accumulated earnings and profits is reported to the
shareholder as a dividend. Any part of a distribution that is not from
earnings and profits is applied against and reduces the adjusted basis
of the stock in the hands of the shareholder. To the extent the
balance is more than the adjusted basis of the stock, the shareholder
has a gain (usually a capital gain) from the sale or exchange of
property.
For information on shareholder reporting of corporate
distributions, see Publication 550,
Investment Income and
Expenses.
Form 1099-DIV.
File Form 1099-DIV with the IRS for each shareholder to whom
you have paid dividends and other distributions on stock of $10 or
more during a calendar year. You must generally send Forms
1099-DIV to the IRS with Form 1096
by February 28 (March 31 if filing
electronically) of the year following the year of the distribution.
For more information, see the general instructions for Forms 1099,
1098, 5498, and W-2G.
Generally, you must furnish Forms 1099-DIV to shareholders by
January 31 of the year following the close of the calendar year during
which the corporation made the distributions. However, you may furnish
the Form 1099-DIV to shareholders after November 30 of the year
of the distributions if the corporation has made its final
distributions for the year. You may furnish the Form 1099-DIV to
shareholders anytime after April 30 of the year of the distributions
if you give the Form 1099-DIV with the final distributions for
the calendar year.
Backup withholding.
Dividends may be subject to backup withholding. For more
information on backup withholding, see the general instructions for
Forms 1099, 1098, 5498, and W-2G.
Form 5452.
File Form 5452 if nondividend distributions were made to
shareholders.
A calendar tax year corporation must file Form 5452 with its income
tax return for the tax year in which the nondividend distributions
were made. A fiscal tax year corporation must file Form 5452 with its
income tax return due for the first fiscal year ending after the
calendar year in which the nondividend distributions were made.
Current year earnings and profits.
If a corporation's earnings and profits for the year (figured as of
the close of the year without reduction for any distributions made
during the year) are more than the total amount of distributions made
during the year, all distributions made during the year are treated as
distributions of current year earnings and profits. If the total
amount of distributions is more than the earnings and profits for the
year, see Accumulated earnings and profits, later.
Example.
You are the only shareholder of a corporation that uses the
calendar year as its tax year. In January, you use the worksheet in
the Form 5452 instructions to figure your corporation's current year
earnings and profits for the previous year. During the year, the
corporation made four $1,000 distributions to you. At the end of the
year (before subtracting distributions made during the year), the
corporation had $10,000 of current year earnings and profits.
Since the corporation's current year earnings and profits ($10,000)
were more than the amount of the distributions it made during the year
($4,000), all of the distributions are treated as distributions of
current year earnings and profits.
The corporation must issue a Form 1099-DIV to you by the end
of January to report the $4,000 distributed to you during the previous
year as dividends. The corporation must use Form 1096 to report this
information to the IRS by February 28 (March 31 if filing
electronically). The corporation does not deduct these dividends on
its income tax return.
Accumulated earnings and profits.
If a corporation's current year earnings and profits (figured as of
the close of the year without reduction for any distributions made
during the year) are less than the total distributions made during the
year, part or all of each distribution is treated as a distribution of
accumulated earnings and profits. Accumulated earnings and profits are
earnings and profits the corporation accumulated before the current
year.
If the total amount of distributions is less than current year
earnings and profits, see Current year earnings and profits,
earlier.
Used with current year earnings and profits.
If the corporation has current year earnings and profits, figure
the use of accumulated and current earnings and profits as follows.
- Divide the current year earnings and profits by the total
distributions made during the year.
- Multiply each distribution by the percentage figured in (1)
to get the amount treated as a distribution of current year earnings
and profits.
- Start with the first distribution and treat the part of each
distribution greater than the allocated current year earnings and
profits figured in (2) as a distribution of accumulated earnings and
profits.
- If accumulated earnings and profits are reduced to zero, the
remaining part of each distribution is applied against and reduces the
adjusted basis of the stock in the hands of the shareholders. To the
extent that the balance is more than the adjusted basis of the stock,
it is treated as a gain from the sale or exchange of property.
Example.
You are the only shareholder of a corporation that uses the
calendar year as its tax year. In January, you use the worksheet in
the Form 5452 instructions to figure your corporation's current year
earnings and profits for the previous year. At the beginning of the
year, the corporation's accumulated earnings and profits balance was
$20,000. During the year, the corporation made four $4,000
distributions to you. At the end of the year (before subtracting
distributions made during the year), the corporation had $10,000 of
current year earnings and profits.
Since the corporation's current year earnings and profits ($10,000)
were less than the distributions it made during the year ($16,000),
part of each distribution is treated as a distribution of accumulated
earnings and profits. Treat the distributions as follows.
- Divide the current year earnings and profits ($10,000) by
the total amount of distributions made during the year ($16,000). The
result is .625.
- Multiply each $4,000 distribution by the .625 figured in (1)
to get the amount ($2,500) of each distribution treated as a
distribution of current year earnings and profits.
- The remaining $1,500 of each distribution is treated as a
distribution from accumulated earnings and profits. The corporation
distributed $6,000 ($1,500 × 4) of accumulated earnings and
profits.
The remaining $14,000 ($20,000 - $6,000) of accumulated
earnings and profits is available for use in the following year.
The corporation must issue a Form 1099-DIV to you by the end
of January to report the $16,000 distributed to you during the
previous year as dividends. The corporation must use Form 1096 to
report this information to the IRS by February 28 (March 31 if filing
electronically). The corporation does not deduct these dividends on
its income tax return.
Used without current year earnings and profits.
If the corporation has no current year earnings and profits, figure
the use of accumulated earnings and profits as follows.
- If the current year earnings and profits balance is
negative, prorate the negative balance to the date of each
distribution made during the year.
- Figure the available accumulated earnings and profits
balance on the date of each distribution by subtracting the prorated
amount of current year earnings and profits from the accumulated
balance.
- Treat each distribution as a distribution of these adjusted
accumulated earnings and profits.
- If adjusted accumulated earnings and profits are reduced to
zero, the remaining distributions are applied against and reduce the
adjusted basis of the stock in the hands of the shareholders. To the
extent that the balance is more than the adjusted basis of the stock,
it is treated as a gain from the sale or exchange of property.
Example.
You are the only shareholder of a corporation that uses the
calendar year as its tax year. In January, you use the worksheet in
the Form 5452 instructions to figure your corporation's current year
earnings and profits for the previous year. At the beginning of the
year, the corporation's accumulated earnings and profits balance was
$20,000. During the year, the corporation made four $4,000
distributions to you on March 31, June 30, September 30, and December
31. At the end of the year (before subtracting distributions made
during the year), the corporation had a negative current year
($10,000) earnings and profits balance.
Since the corporation had no current year earnings and profits, all
of the distributions are treated as distributions of accumulated
earnings and profits. Treat the distributions as follows.
- Prorate the negative current year earnings and profits
balance to the date of each distribution made during the year. The
negative $10,000 can be spread evenly by prorating a negative $2,500
to each distribution.
- The following table shows how to figure the available
accumulated earnings and profits balance on the date of each
distribution.
March 31 Distribution |
Accumulated earnings and profits |
$20,000 |
Prorated current year earnings and
profits |
($2,500) |
Accumulated earnings and profits
available |
$17,500 |
Amount of distribution treated as a
dividend |
($4,000) |
June 30 Distribution |
Accumulated earnings and profits |
$13,500 |
Prorated current year earnings and
profits |
($2,500) |
Accumulated earnings and profits
available |
$11,000 |
Amount of distribution treated as a
dividend |
($4,000) |
September 30 Distribution |
Accumulated earnings and profits |
$7,000 |
Prorated current year earnings and
profits |
($2,500) |
Accumulated earnings and profits
available |
$4,500 |
Amount of distribution treated as a
dividend |
($4,000) |
December 31 Distribution |
Accumulated earnings and profits |
$500 |
Prorated current year earnings and
profits |
($2,500) |
Accumulated earnings and profits
available |
($2,000) |
Amount of distribution treated as a
dividend |
$0 |
Nondividend amount (reduction of stock
basis or gain from sale/exchange of property) |
$4,000 |
Year-end accumulated earnings and
profits |
($2,000) |
The corporation must issue a Form 1099-DIV to you by the end
of January to report $12,000 of the $16,000 distributed to you during
the previous year as dividends. The corporation must use Form 1096 to
report this information to the IRS by February 28 (March 31 if filing
electronically). The corporation does not deduct these dividends on
its income tax return. However, the corporation must attach Form 5452
to this return to report the nondividend distribution.
For more information about earnings and profits, see the
Worksheet for Figuring Current Year Earnings and Profits in
the Form 5452 instructions.
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