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Non Liquidating Distribution of Corporations

Chapter 4 – Non-Liquidating Distribution of Corporations

Types of NLD:

  1. Distribution of property or cash

                        *Not used for stock exchange

  1. Distribution of stocks of the corporation (dividend stock)
  2. Distribution of property or cash (exchange to stock redemption)


            Dividents à corp. extent in profit and earning (E&P)

  • non-corporate taxpayer ( 20% tax = capl. gain rate)

            Exceeding (E&P)

  • capital return
  • capital gain



Earning and Profits (E&P)

Taxable Income (sex. 312)

+ Tax exempt income [1]

Depreciation [2]

Plus dividends [3]

Plus carryovers [4]

Minus Fed income tax

Minus Charity donation/ Cap loss limit & Actual donation / cap loss

Minus non-deductable expense [5]


[1] life insurance proceed, tax exempt interest

[2] plus or minus of (E&P and Tax)

[3] org expense deduction, dividends collected deductions

[4] NOL, charity, cap loss

[5] tax exempt expense, keyman life ins, pol. vontributions, penalties

E&P Distribution

  • Made fist out of recent E&P then amassed E&P
  • If corporation has +CEP
    • Divided to CEP extend even if:

*aEP is deficit (applies to nimble dividend rule)

  • Distribution reduce E&P
    • Not below to zero, and or;
    • Increase deficit
    • AEP end of year = aep prior year +CEP – dividend value

Ordering rules multiple distributions

  • ceP = proportionally allocated based on distributions
  • aEP = chronological allocation
    • note: same day distribution
  • should be allocated using E&P rule

Property Distribution



Recognize gain (NOT loss)

-treat as sold for FMV

– gain E&P

Distribution (property FMV)

-less liability of shareholder (not below zero)

FMV dist. not < property FMV

Less liability from shareholder (not below zero)

Basis of prop. distributed

-less liability assumed

Reduce E&P using prop. FMV

-no reduction from liability of shareholder

-if prop. loss (less from AB)

After distribution marks holding period



Non-taxable stock dividends

  1. Total amount of basis should be allocated before
  2. distribution of new and old shared

                                                and if dividend is different stock class

                                                            *should be allocated as to FMV

  1. Holding period is tacked
  2. No impact with corp

                        – NO GAIN/LOSS

                        – NO E&P IMPACT

Taxable Dividends

  • Only taxable if shareholder proportionate interest
    • Can elect to take prop. or stock
    • Some shareholders receive stock/property
    • Some shareholders receive preferred/ common
    • Distribution on pref. stock
      • Not OF
    • Distribution OF pref. stock convertible




Rules of Attribution

  • Own constructively stock by means of:
    • Spouse
    • Child
    • No double attribution in family
    • Grandchild
    • Parent

*not : grandparents, brothers, sisters

Rules of Attribution (Entity)

  • Attribute stock by estate to partner proportinally
  • Attribute stock by C Corp to SH

*ONLY            if SH owns >50%                     

Susbstantially Disproportionate

  1. Vote <50%
  2. Voting stock <80%
  3. Common Owned <80%

Absolute Termination

  1. Use attribution rules, waive if:

            – No interest attained except being creditor

            – IRS file written aggreement notifies any acquired interest

            – 10 years after redemption cant be acquired besides inheritance

                        In 10 years:

  • Stock is not acquired by redeemed SH
  • No stock is attributable to the stock of redeemed SH
  • No tax purpose make it non-applicable

NEED (Not essentially equivalent to dividend)

  • Should be meaninful reduction (earnings, liquidation, earnings)
  • Circumstances and facts
  • Davis case
  • No control
  • Application of attribution rules
  • Lose control = NEED

Partial Liquidation

  • Discontinued line of business
  • Should be bonafide business contraction
  • At corporate level (not essentially equivalent with dividend)
  • Only applicable in shareholders who are non-corporate

Redemption Analysis

  1. Is redemption present? If yes, use option 2
  2. Does redemption applies any categoris for exchange? If no, distribution rules is applied. If yes, sale rules are used, requirements:
  • Disproportionate on substantial leve
  • Absolute termination
  • Not equal to dividend (essentially)
  • Liquidation should be partial

Tax Treatment (Redemption)







Received amount-adj. basis= cap gain

Reduce E&P by proportionate stock redeemed

Amount received allocated to corp. extent, cap gain, return basis

Reduce E&P by FMV on dividend amount





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