Frequently Asked Questions
Who is eligible for the Tax-Free Return of Capital Distribution?
Applies to shareholders receiving corporate distributions when the corporation has no accumulated or current earnings and profits.
How does the Tax-Free Return of Capital Distribution work?
Distributions made by a corporation that exceed its earnings and profits are not taxed as dividends; instead, they reduce the shareholder's basis in the stock.
What law authorizes the Tax-Free Return of Capital Distribution?
The Tax-Free Return of Capital Distribution is authorized under IRC §301(c)(2) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §301
Source: Internal Revenue Code, Title 26, United States Code
§ 301. Distributions of property(a) In generalExcept as otherwise provided in this chapter, a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c).
(b) Amount distributed(1) General ruleFor purposes of this section, the amount of any distribution shall be the amount of money received, plus the fair market value of the other property received.
(2) Reduction for liabilitiesThe amount of any distribution determined under paragraph (1) shall be reduced (but not below zero) by—(A) the amount of any liability of the corporation assumed by the shareholder in connection with the distribution, and
(B) the amount of any liability to which the property received by the shareholder is subject immediately before, and immediately after, the distribution.
(3) Determination of fair market valueFor purposes of this section, fair market value shall be determined as of the date of the distribution.
(c) Amount taxableIn the case of a distribution to which subsection (a) applies—(1) Amount constituting dividendThat portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income.
(2) Amount applied against basisThat portion of the distribution which is not a dividend shall be applied against and reduce the adjusted basis of the stock.
(3) Amount in excess of basis(A) In generalExcept as provided in subparagraph (B), that portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock, shall be treated as gain from the sale or exchange of property.
(B) Distributions out of increase in value accrued before March 1, 1913That portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock and to the extent that it is out of increase in value accrued before March 1, 1913, shall be exempt from tax.
(d) BasisThe basis of property received in a distribution to which subsection (a) applies shall be the fair market value of such property.
(e) Special rule for certain distributions received by 20 percent corporate shareholder(1) In generalExcept to the extent otherwise provided in regulations, solely for purposes of determining the taxable income of any 20 percent corporate shareholder (and its adjusted basis in the stock of the distributing corporation), section 312 shall be applied with respect to the distributing corporation as if it did not contain subsections (k) and (n) thereof.
(2) 20 percent corporate shareholderFor purposes of this subsection, the term “20 percent corporate shareholder” means, with respect to any distribution, any corporation which owns (directly or through the application of section 318)—(A) stock in the corporation making the distribution possessing at least 20 percent of the total combined voting power of all classes of stock entitled to vote, or
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