Frequently Asked Questions
Who is eligible for the Earnings and Profits Reduction for Liabilities?
Corporations distributing property encumbered by debt or where the shareholder assumes corporate debt in connection with the distribution.
How does the Earnings and Profits Reduction for Liabilities work?
Reduces the impact of property distributions on corporate earnings and profits by the amount of any liability to which the property is subject or any liability assumed by the shareholder.
What law authorizes the Earnings and Profits Reduction for Liabilities?
The Earnings and Profits Reduction for Liabilities is authorized under IRC §312(c) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §312
Source: Internal Revenue Code, Title 26, United States Code
§ 312. Effect on earnings and profits(a) General ruleExcept as otherwise provided in this section, on the distribution of property by a corporation with respect to its stock, the earnings and profits of the corporation (to the extent thereof) shall be decreased by the sum of—(1) the amount of money,
(2) the principal amount of the obligations of such corporation (or, in the case of obligations having original issue discount, the aggregate issue price of such obligations), and
(3) the adjusted basis of the other property, so distributed.
(b) Distributions of appreciated propertyOn the distribution by a corporation, with respect to its stock, of any property (other than an obligation of such corporation) the fair market value of which exceeds the adjusted basis thereof—(1) the earnings and profits of the corporation shall be increased by the amount of such excess, and
(2) subsection (a)(3) shall be applied by substituting “fair market value” for “adjusted basis”.
For purposes of this subsection and subsection (a), the adjusted basis of any property is its adjusted basis as determined for purposes of computing earnings and profits.
(c) Adjustments for liabilitiesIn making the adjustments to the earnings and profits of a corporation under subsection (a) or (b), proper adjustment shall be made for—(1) the amount of any liability to which the property distributed is subject, and
(2) the amount of any liability of the corporation assumed by a shareholder in connection with the distribution.
(d) Certain distributions of stock and securities(1) In generalThe distribution to a distributee by or on behalf of a corporation of its stock or securities, of stock or securities in another corporation, or of property, in a distribution to which this title applies, shall not be considered a distribution of the earnings and profits of any corporation—(A) if no gain to such distributee from the receipt of such stock or securities, or property, was recognized under this title, or
(B) if the distribution was not subject to tax in the hands of such distributee by reason of section 305(a).
(2) Stock or securitiesFor purposes of this subsection, the term “stock or securities” includes rights to acquire stock or securities.
[(e) Repealed. Pub. L. 98–369, div. A, title I, § 61(a)(2)(B), July 18, 1984, 98 Stat. 581]
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