Corporate Tax | Just Tax
Corporate-Level Distribution Consequences (§ 311)
This checklist analyzes the corporate-level tax consequences of a non-liquidating distribution of property under § 311, including the § 311(b) deemed-sale gain rule, liability netting, basis effects, and E&P consequences. Use it whenever a C corporation distributes appreciated or depreciated property to a shareholder.
"Except as provided in subsection (b), no gain or loss shall be recognized to a corporation on the distribution (not in complete liquidation) with respect to its stock of (1) its stock (or rights to acquire its stock), or (2) property."
- General Utilities Doctrine Codification.
- § 311(a) codifies the rule from General Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935) (corporation recognized no taxable gain on distribution of appreciated Islands Edison stock to shareholders as dividend because corporation merely changed form of assets).
- TRA 1986 repealed the General Utilities doctrine for appreciated property by enacting § 311(b).
- Today § 311(a) still shields distributions of corporate obligations and the distributing corporation's own stock from recognition. See Step 13 for treatment of stock distributions.
- Scope of Distributions Covered.
- Treas. Reg. § 1.311-1(a) defines "distributions with respect to its stock" to include distributions made in redemption of stock.
- Treas. Reg. § 1.311-1(e)(1) limits § 311 to distributions made by reason of the corporation-shareholder relationship and excludes transactions in a shareholder's capacity as debtor, creditor, employee, or vendee.
- The distribution must be "not in complete liquidation" to fall within § 311(a). Liquidating distributions are governed by § 336. See Step 15 for the § 311 vs. § 336 comparison.
- Property Subject to the General Rule.
- Under § 311(a)(2), property distributions generally trigger no gain or loss at the corporate level unless the exception in § 311(b) applies.
- Under § 311(a)(1), a corporation's own stock and rights to acquire such stock are always nonrecognized regardless of appreciation.
- TRAP. The general nonrecognition rule in § 311(a) does NOT apply to appreciated property under § 311(b). Always check § 311(b) before concluding that no gain is recognized. See Step 2.
"If (A) a corporation distributes property (other than an obligation of such corporation) to a shareholder in a distribution to which subpart A applies, and (B) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation), then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value."
- The Gain Recognition Trigger.
- Gain is recognized whenever a corporation distributes property with FMV exceeding adjusted basis in a distribution to which subpart A applies.
- Subpart A includes §§ 301 through 307, covering dividend distributions and redemptions. It does not include distributions in complete liquidation (governed by § 336) or distributions pursuant to a plan of reorganization under § 361(c)(4).
- The gain is computed as if the corporation sold the property to the distributee at FMV on the date of distribution.
- The Pope & Talbot Gain Measurement Rule.
- Pope & Talbot, Inc. v. Commissioner, 104 T.C. 574 (1995), aff'd, 162 F.3d 1236 (9th Cir. 1999) (Tax Court held corporation's gain under § 311(b) computed as if it sold underlying Washington Properties at FMV, NOT by reference to value of individual partnership interests. Ninth Circuit affirmed).
- FMV is determined as if the corporation sold the property at the time of distribution, not by the value of the property in the hands of the shareholder.
- EXAMPLE. Corporation X distributes Blackacre with $100,000 adjusted basis and $250,000 FMV. X recognizes $150,000 gain as if X sold Blackacre for $250,000.
- Limitations and Exclusions from § 311(b)(1).
- § 311(b)(1) expressly excludes "an obligation of such corporation" from gain recognition. See Step 8 for treatment of corporate obligations.
- The statute does NOT authorize loss recognition. If FMV is less than adjusted basis, the loss is nondeductible under § 311(a).
- TRAP. Gains and losses on multiple property distributions CANNOT be netted. Rev. Rul. 76-377, 1976-2 C.B. 91 (each asset analyzed separately. Gains recognized, losses nondeductible). See Step 4.
"For purposes of this part, the term 'property' means money, securities, and any other property; except that such term does not include stock in the corporation making the distribution (or rights to acquire such stock)."
- The Expansive Definition of Property.
- § 317(a) defines property broadly to include money, securities, and any other property.
- "Any other property" has been interpreted to cover tangible personal property, real property, intangible assets, installment obligations, and interests in partnerships and trusts.
- This expansive definition ensures nearly all non-stock assets distributed by a corporation trigger potential gain recognition under § 311(b).
- Sole Exclusion for Distributing Corporation's Own Stock.
- The only statutory exclusion from the definition of "property" is stock in the corporation making the distribution and rights to acquire such stock.
- Stock of another (non-distributing) corporation constitutes "property" and triggers § 311(b) gain if appreciated. See Rev. Rul. 68-21, 1968-1 C.B. 358 (corporation distributed appreciated stock of Y corporation to shareholder in partial redemption. Held that § 311(b) requires gain recognition on in-kind redemptions because the distribution is treated as a deemed sale at FMV).
- CAUTION. Stock of a subsidiary corporation is "property" under § 317(a), not the distributing corporation's own stock. Distributing appreciated subsidiary stock triggers § 311(b) gain. See also Rev. Rul. 87-96, 1987-2 C.B. 209 (distribution of CFC stock triggers § 311(b) gain and § 1248(a) recharacterizes gain as dividend to extent of CFC's E&P).
- Installment Obligations as Property.
- A corporation's own installment obligations acquired from third parties constitute "property" under § 317(a).
- The distributing corporation's own obligations are excluded from § 311(b)(1) but are still "property" for purposes of shareholder income under § 301.
- See Step 9 for detailed analysis of installment obligation distributions.
- Character Determined by Reference to the Distributed Asset.
- The character of gain recognized under § 311(b) is determined by reference to the character of the distributed property in the hands of the distributing corporation.
- If the distributed property is depreciable personal property subject to § 1245, the gain is ordinary income to the extent of depreciation recapture. See Step 5 for § 1245 analysis.
- If the distributed property is depreciable real property subject to § 1250, the gain is subject to § 1250 recapture rules. See Step 6 for § 1250 analysis.
- Asset-by-Asset Character Determination.
- H&M Auto Electric, Inc. v. Commissioner, 92 T.C. 1269 (1989) (character of gain determined asset-by-asset by reference to the distributing corporation's use and holding period for each property).
- The character of gain is not fungible across a basket of distributed assets. Each distributed asset stands on its own for character purposes.
- EXAMPLE. If a corporation distributes § 1231 property and capital gain property in the same transaction, the § 311(b) gain from each asset takes on the character of that specific asset.
- Rate Classifications for Corporate Gain.
- Gain on distributed capital assets held more than one year generates long-term capital gain at the applicable corporate rate under § 11.
- Corporate taxpayers do not benefit from preferential capital gains rates under § 1(h), so the distinction between capital gain and ordinary income matters primarily for loss offset limitations.
- § 1231 gain is treated as ordinary income to the extent of non-recaptured § 1231 losses from the prior five years under § 1231(c).
- Full Recapture on Non-Liquidating Distributions.
- Treas. Reg. § 1.1245-1(b) provides that in the case of a corporation distributing § 1245 property to shareholders in a distribution to which § 301 applies, FMV of the property is treated as the amount realized for § 1245(a)(1) purposes.
- The corporation recognizes ordinary income equal to the lesser of (i) total depreciation taken or (ii) the excess of FMV over adjusted basis.
- EXAMPLE. Corporation distributes equipment with $20,000 adjusted basis, $50,000 FMV, and $35,000 of accumulated depreciation. The corporation recognizes $30,000 of ordinary income under § 1245, which is the lesser of $35,000 depreciation taken or $30,000 gain.
- § 1245(b)(3) Does Not Apply to § 311 Distributions.
- Treas. Reg. § 1.1245-4(c) provides that § 1245(b)(3) limits recapture to gain recognized on transfer and covers §§ 332, 351, 361, 721, and 731 only.
- § 311 is NOT listed in § 1245(b)(3) because § 301(d) gives the shareholder a basis equal to FMV, not a carryover basis.
- TRAP. Unlike carryover-basis transactions, § 311 distributions subject the FULL amount of gain to § 1245 recapture without limitation. Do not assume § 1245(b)(3) caps recapture at the corporation's gain.
- Coordination with § 311(b) and E&P Adjustments.
- The § 1245 recapture amount increases the corporation's ordinary income, which in turn increases current E&P under § 312 and Treas. Reg. § 1.312-1.
- The character of the income (ordinary vs. capital) affects the corporation's taxes payable and therefore E&P, because corporate taxes reduce E&P.
- See Step 11 for the complete E&P adjustment framework and Step 2 for the general § 311(b) gain computation rule.
- § 1250 Recapture Mechanics for Distributions.
- Treas. Reg. § 1.1250-1 provides that the applicable percentage of the lower of additional depreciation or gain is treated as ordinary income on disposition of § 1250 property.
- FMV is treated as the amount realized on distributions of § 1250 property to shareholders.
- For corporations, § 291(a)(1) requires additional ordinary income recapture of 20% of the excess of what would have been recaptured under § 1245 over what is actually recaptured under § 1250.
- Post-1986 Property and Minimal § 1250 Recapture.
- For most post-1986 commercial real property, additional depreciation is zero because straight-line depreciation was required under MACRS.
- With no additional depreciation, § 1250 recapture is typically zero for post-1986 real property, and the gain is § 1231 gain or 25% unrecaptured § 1250 gain at the shareholder level.
- CAUTION. Pre-1987 accelerated-depreciation real property can trigger significant § 1250 recapture. Always verify the depreciation method and placed-in-service date for distributed real estate. See § 1(h)(1)(E) for the 25% rate on unrecaptured § 1250 gain at the individual shareholder level.
- § 1250(d)(3) Does Not Apply to § 311 Distributions.
- Treas. Reg. § 1.1250-3(f) provides that § 1250(d)(3) applies the same limitation as § 1245(b)(3) for carryover-basis transactions.
- § 311 is NOT listed in § 1250(d)(3) because the shareholder takes an FMV basis under § 301(d), not a carryover basis.
- TRAP. Full recapture applies to § 311 distributions. The limitations that protect carryover-basis transactions do not shelter nonliquidating distributions. See Step 5 for the analogous § 1245 analysis.
- Ordinary Income on Sales to Related Persons.
- § 1239(a) provides that gain recognized on a sale or exchange of property between related persons is treated as ordinary income if the property is depreciable in the hands of the transferee.
- § 311(b) treats a distribution as a deemed sale to the distributee. If the distributee is a related person and the property is depreciable to the distributee, § 1239 converts the gain to ordinary income.
- "Related person" for § 1239 is defined in § 1239(b) to include a shareholder who owns more than 50% of the corporation's stock by value.
- Constructive Ownership Rules.
- § 1239(c) applies the constructive ownership rules of § 318(a) for determining whether the distributee is a related person.
- Under § 318(a), stock owned by family members and by entities in which the shareholder has an interest is attributed to the shareholder.
- TRAP. A controlling shareholder receiving depreciable property in a § 311 distribution will trigger § 1239 ordinary income treatment. Plan distributions to non-related shareholders when possible to preserve capital gain character.
- Coordination with § 311(b) and Recapture Provisions.
- § 1239 applies in addition to § 1245 and § 1250 recapture. The gain is ordinary income by operation of multiple provisions.
- § 1239 trumps any capital gain characterization that might otherwise apply under § 1231.
- See Step 5 for § 1245 recapture and Step 8 for the related-person liability assumption rules.
- § 311(b)(2) FMV Floor Rule.
- § 311(b)(2) provides that the FMV of distributed property shall be treated as not less than the amount of liability assumed by the distributee or to which the property is subject.
- If a shareholder assumes a liability attached to distributed property, the corporation's gain cannot be less than the excess of the liability over adjusted basis.
- EXAMPLE. Corporation distributes property with $40,000 adjusted basis, $35,000 FMV, and $50,000 mortgage. Gain is $10,000 ($50,000 liability minus $40,000 basis) because the FMV is deemed to be at least $50,000.
- Liability Allocation Methodology.
- H&M Auto Electric, Inc. v. Commissioner, 92 T.C. 1269 (1989) (liabilities allocated asset-by-asset. secured liability allocated to property securing the note. unsecured liabilities allocated pro rata by FMV).
- Rev. Rul. 80-283, 1980-2 C.B. 108 (liabilities allocated asset-by-asset. secured to the securing property. unsecured pro rata by FMV).
- Treas. Reg. § 1.312-3 provides that liabilities are treated as money received, reducing E&P. If the liability exceeds adjusted basis of distributed property, the excess is treated as gain.
- Impact on Shareholder and E&P.
- Under § 301(b)(2), the shareholder's amount of distribution includes the liability assumed or attached to the property.
- Under § 312(a)(2), the corporation reduces E&P by the principal amount of obligations of the corporation distributed.
- See Step 11 for the full E&P adjustment framework when liabilities are involved in the distribution.
- Gain Recognition on Distributed Installment Obligations.
- § 453B(a) requires gain or loss when an installment obligation is distributed, measured by the difference between basis of the obligation and its FMV at the time of distribution.
- Rev. Rul. 74-337, 1974-2 C.B. 94 (corporation distributing installment obligation to shareholder recognizes gain equal to FMV less adjusted basis of obligation).
- The character of the gain is determined by reference to the property that generated the installment obligation in the original sale.
- Basis and Holding Period of Distributed Obligations.
- The shareholder takes a basis in the installment obligation equal to its FMV at the date of distribution under § 301(d).
- The shareholder's holding period begins on the date of distribution, not on the date the corporation originally received the obligation.
- When the shareholder collects on the installment obligation, any post-distribution appreciation is taxed to the shareholder under § 453.
- Coordination with § 311 and E&P Effects.
- The distributing corporation's gain under § 453B(a) increases current E&P under § 312(b) and Treas. Reg. § 1.312-1.
- The corporation reduces E&P by the principal amount of its own obligations distributed under § 312(a)(2).
- TRAP. A corporation cannot defer gain on an installment obligation by distributing it to shareholders. The distribution accelerates the gain at the corporate level under § 453B(a). See Step 11 for E&P adjustments and Step 3 for installment obligations as "property."
- § 311(b)(3) Special Rule for Passthrough Entity Interests.
- § 311(b)(3) authorizes the Secretary to issue regulations providing that gain recognized on distribution of a partnership or trust interest shall be computed without regard to any loss attributable to property contributed to the entity for the principal purpose of recognizing such loss on distribution.
- Congress enacted this provision to prevent corporations from contributing loss property to partnerships and then distributing the partnership interest to recognize the built-in loss against other gain.
- No regulations have been finalized under § 311(b)(3) as of the date of this checklist, but the statutory authority remains.
- Gain Computation on Distributed Entity Interests.
- Absent regulations under § 311(b)(3), the general § 311(b)(1) rule applies. Gain is computed as if the corporation sold the partnership or trust interest at FMV.
- Pope & Talbot, Inc. v. Commissioner, 104 T.C. 574 (1995), aff'd, 162 F.3d 1236 (9th Cir. 1999) (gain measured by reference to underlying assets' FMV, not by the value of individual partnership interests).
- The character of the gain follows the character of the partnership interest or trust interest in the corporation's hands, typically capital gain under § 741.
- Inside Basis and Outside Basis Considerations.
- The distribution does not trigger any adjustment to the partnership's inside basis in its assets.
- The shareholder takes an FMV basis in the partnership interest under § 301(d), creating a potential outside basis disparity with the partnership's inside basis.
- CAUTION. Consider whether § 743(b) optional basis adjustment is available if the partnership has a § 754 election in effect. The step-up in partnership interest basis may have downstream tax consequences. See Step 14 for anti-abuse concerns and Step 11 for E&P effects.
- E&P Decrease Under § 312(a).
- § 312(a) requires E&P to be decreased on any distribution of property by the sum of (1) money distributed, (2) principal amount of obligations of the corporation distributed, and (3) adjusted basis of other property distributed.
- Treas. Reg. § 1.312-2 confirms that for distributions to which § 301 applies, E&P is decreased by money distributed, FMV of property distributed, and liabilities assumed or attached.
- Rev. Rul. 74-164, 1974-1 C.B. 74 (current E&P allocated ratably among all distributions made during taxable year. if total distributions exceed current E&P, each shareholder's proportionate share determined ratably by distribution amount).
- E&P Increase Under § 312(b) for Appreciated Property.
- § 312(b)(1) requires E&P to be increased by the amount by which FMV exceeds adjusted basis of distributed property.
- § 312(b)(2) requires that § 312(a)(3) be applied by substituting "fair market value" for "adjusted basis" when appreciated property is distributed.
- Treas. Reg. § 1.312-1 provides that recognized gain increases E&P. All items of gain, loss, and deduction recognized for tax purposes are taken into account in computing E&P.
- Net Effect of E&P Adjustments.
- For appreciated property, the net E&P effect is a decrease equal to the adjusted basis of the property. The FMV of the property reduces E&P, but the built-in gain first increases E&P, netting to the adjusted basis reduction.
- EXAMPLE. Corporation distributes property with $10,000 adjusted basis and $25,000 FMV. E&P increases by $15,000 under § 312(b)(1), then decreases by $25,000 under § 312(a)(3) as modified by § 312(b)(2). Net decrease is $10,000 (the adjusted basis of the property).
- CAUTION. If the corporation lacks sufficient E&P to cover the distribution, the distribution may still be taxed as a dividend to the extent of E&P under § 301(c)(1). Always verify E&P adequacy before advising on distribution character. See Step 12 for pre-repeal General Utilities E&P effects and Step 15 for E&P in liquidating distributions.
- The Original General Utilities Rule.
- General Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935) (Supreme Court held corporation recognized no taxable gain on distribution of appreciated Islands Edison stock to shareholders as dividend. corporation merely changed form of assets).
- The General Utilities doctrine permitted corporations to distribute appreciated property to shareholders without recognizing gain at the corporate level.
- Congress codified the doctrine in the 1954 Code as old § 311(a), subject to exceptions for LIFO inventory and liabilities exceeding basis.
- TRA 1986 Repeal and Its Scope.
- TRA 1986 repealed the General Utilities doctrine by enacting § 311(b), requiring gain recognition on distributions of appreciated property.
- The repeal was intended to create parity between liquidating and nonliquidating distributions. Both now trigger gain recognition (§ 336 for liquidations, § 311(b) for nonliquidating distributions).
- Transitional rules under old § 311(d)(2) protected certain distributions made during the transition period, but these have long since expired.
- Surviving Applications of the General Utilities Doctrine.
- The doctrine survives in attenuated form for distributions of a corporation's own stock under § 311(a)(1). See Step 13.
- § 311(a) still shields distributions of corporate obligations from gain recognition under § 311(b)(1), although § 361 may require recognition in reorganization contexts.
- The doctrine also survives through § 337(a) (liquidating distributions to 80-percent distributees) and in certain reorganization contexts where gain is deferred under subchapter C.
- Complete Nonrecognition Under § 311(a)(1).
- § 311(a)(1) provides that no gain or loss is recognized on the distribution of a corporation's own stock (or rights to acquire such stock) with respect to its stock.
- This includes stock dividends, stock splits, and distributions of rights to acquire stock. The distributing corporation recognizes no gain regardless of whether the stock has appreciated in value.
- Treas. Reg. § 1.311-1(b) confirms that no gain or loss is recognized on distribution of a corporation's own stock or other property, subject to the appreciated property exception in § 311(b).
- Shareholder-Level Consequences Under § 305.
- § 305(a) generally excludes stock dividends from the shareholder's gross income unless one of the exceptions in § 305(b) applies.
- Eisner v. Macomber, 252 U.S. 189 (1920) (pro rata stock dividends are not taxable income because shareholder's proportionate interest remains unchanged. this case provides the constitutional foundation for § 305).
- If § 305(b) applies, the stock dividend is treated as a distribution of property to which § 301 applies, and the shareholder includes the FMV of the distributed stock in income.
- Exceptions to Nonrecognition and Anti-Abuse Concerns.
- § 305(b)(1) through (b)(5) set forth specific situations where stock dividends are treated as taxable distributions, including distributions in lieu of money, disproportionate distributions, common stock to preferred shareholders, and distributions on preferred stock.
- § 305(c) authorizes regulations treating certain transactions as taxable distributions even if not formally labeled as stock dividends.
- CAUTION. A stock distribution coupled with a redemption or other transaction may trigger § 305(b)(2) if some shareholders receive cash while others increase their proportionate interests. See Step 14 for step-transaction concerns.
- Step-Transaction Doctrine.
- Penrod v. Commissioner, 88 T.C. 1415 (1987) (three tests for step-transaction are (1) binding commitment, (2) mutual interdependence, and (3) end result).
- Gregory v. Helvering, 293 U.S. 465 (1935) (transaction with form of reorganization but no business substance is disregarded. described as "an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else").
- Esmark, Inc. v. Commissioner, 90 T.C. 171 (1988), aff'd, 886 F.2d 1318 (7th Cir. 1989) (step-transaction did NOT apply where each step had independent economic significance. Mobil's ownership of Esmark shares had permanent economic consequences. "no route was more direct").
- Economic Substance Doctrine.
- § 7701(o)(1) provides that a transaction has economic substance only if (A) the transaction changes in a meaningful way the taxpayer's economic position apart from Federal income tax effects, and (B) the taxpayer has a substantial purpose apart from Federal income tax effects for entering into the transaction.
- A strict liability penalty of 40% applies under § 6662(i) for nondisclosed transactions lacking economic substance.
- TRAP. A distribution of appreciated property to a controlling shareholder followed by a recontribution or sale back to the corporation may be collapsed into a single taxable event under the step-transaction doctrine. Ensure each step has independent business purpose.
- Barnes Group as a Cautionary Tale on Step-Transaction.
- Barnes Group Inc. v. Commissioner, T.C. Memo 2013-109, aff'd 769 F.3d 89 (2d Cir. 2014) (series of § 351 exchanges with Bermuda and Delaware subsidiaries collapsed into $58M taxable dividend. none of steps had independent business purpose. 20% accuracy-related penalty imposed).
- Rev. Rul. 69-630, 1969-2 C.B. 112 (bargain sale between brother-sister corporations under § 482 treated as constructive distribution to controlling shareholder).
- See Step 8 for liability-driven abuse structures and Step 15 for liquidation-related step-transaction cases.
- The Core Distinction. Nonliquidating vs. Liquidating.
- § 311(a) applies to distributions "not in complete liquidation." § 336(a) applies to distributions "in complete liquidation."
- § 336(a) provides that gain or loss shall be recognized to a liquidating corporation on the distribution of property as if such property were sold to the distributee at FMV.
- Unlike § 311(a), § 336 permits loss recognition on liquidating distributions (subject to limitations in §§ 336(d)(1) and (d)(2)).
- Loss Recognition as the Key Difference from § 336.
- § 311(a) denies loss recognition on nonliquidating distributions. A corporation cannot deduct a loss on property with FMV less than adjusted basis when distributed as a dividend or redemption.
- § 336(a) permits both gain and loss recognition, but § 336(d)(1) disallows losses on distributions to related persons and § 336(d)(2) disallows losses on property acquired by the corporation in a carryover-basis transaction within two years of adoption of the plan of liquidation.
- Rev. Rul. 76-377, 1976-2 C.B. 91 (gains and losses on multiple property distributions under § 311 CANNOT be netted because losses are nondeductible. under § 336, gains and losses generally net at the corporate level).
- Court Holding Doctrine and Liquidation Planning.
- Commissioner v. Court Holding Co., 324 U.S. 331 (1945) (corporation that arranged sale of apartment building and used liquidation and distribution as conduit to pass title to same purchaser was true seller. gain taxable to corporation. step-transaction applied).
- United States v. Cumberland Public Service Co., 338 U.S. 451 (1950) (genuine liquidation followed by shareholder sale to cooperative respected. corporation not taxed on gain. counterpoint to Court Holding. key distinction is who negotiated the sale).
- Telephone Answering Service Co. v. Commissioner, 63 T.C. 423 (1974) (corporation that transferred assets to new corporation and claimed § 337 nonrecognition failed because "liquidation" was not genuine. new corporation was continuation of old business).
- TRAP. A corporation that negotiates a sale and then liquidates to distribute assets to shareholders who complete the same sale will be treated as the true seller under Court Holding. The liquidation must be genuine and the shareholders must negotiate their own sale to avoid corporate-level gain. See Step 14 for step-transaction analysis.
- Corporate Return Reporting Requirements.
- The distributing corporation must report gain recognized under § 311(b) on its Form 1120 for the taxable year of the distribution.
- Form 5452 must be filed if the corporation makes nondividend distributions to report the nontaxable portion of distributions to shareholders.
- Schedule K must accurately reflect the E&P adjustments under §§ 312(a) and 312(b) to support the dividend characterization reported to shareholders.
- Shareholder Information Reporting.
- Form 1099-DIV must be issued to shareholders reporting the amount of taxable dividend distributions under § 301(c)(1).
- If the distribution exceeds current and accumulated E&P, the corporation must provide documentation showing the allocation between dividend income (§ 301(c)(1)), return of capital (§ 301(c)(2)), and capital gain (§ 301(c)(3)).
- Rev. Rul. 74-164, 1974-1 C.B. 74 (the ratable allocation method determines how current E&P is allocated among multiple distributions in the same taxable year and must be documented).
- Audit Trail and Substantiation.
- Corporate minutes and board resolutions should document the business purpose for any distribution of appreciated property.
- Independent appraisals of distributed property should be retained to substantiate FMV. FMV determines the amount of gain under § 311(b) and the shareholder's basis under § 301(d).
- CAUTION. Inadequate documentation of FMV exposes the corporation to adjustments under § 482 if the IRS determines the property was undervalued. Maintain contemporaneous evidence of the valuation methodology and any restrictions on the property. See Step 5 for § 1245 recapture documentation and Step 6 for § 1250 recapture records.