26 CFR § 1.312-4 - Examples of adjustments provided in section 312(c).
The adjustments provided in section 312(c) may be illustrated by the following examples:
On December 2, 1954, Corporation X distributed to its sole shareholder, A, an individual, as a dividend in kind a vacant lot which was not an inventory asset. On that date, the lot had a fair market value of $5,000 and was subject to a mortgage of $2,000. The adjusted basis of the lot was $3,100. The amount of the earnings and profits was $10,000. The amount of the dividend received by A is $3,000 ($5,000, the fair market value, less $2,000, the amount of the mortgage) and the reduction in the earnings and profits of Corporation X is $1,100 ($3,100, the basis, less $2,000, the amount of mortgage).
The facts are the same as in Example (1) above with the exception that the amount of the mortgage to which the property was subject was $4,000. The amount of the dividend received by A is $1,000, and there is no reduction in the earnings and profits of the corporation as a result of the distribution (disregarding such reduction as may result from an increase in tax to Corporation X because, of gain resulting from the distribution). There is a gain of $900 recognized to Corporation X, the difference between the basis of the property ($3,100) and the amount of the mortgage ($4,000), under section 311(c) and an increase in earnings and profits of $900.
Corporation A, having accumulated earnings and profits of $100,000, distributed in kind to its shareholders, not in liquidation, inventory assets which had a basis to it on the “Lifo” method (section 472) of $46,000 and on the basis of cost or market (section 471) of $50,000. The inventory had a fair market value of $55,000 and was subject to a liability of $35,000. This distribution results in a net decrease in earnings and profits of Corporation A of $11,000, (without regard to any tax on Corporation A) computed as follows:
|“Fifo” basis of inventory||$50,000|
|Less: “Lifo” basis of inventory||46,000|
|Gain recognized - addition to earnings and profits (section 311(b))||$4,000|
|Adjustment to earnings and profits required by section 312(b)(1)(A):|
|Fair market value of inventory||$55,000|
|Less: “Lifo” basis plus adjustment under section 311(b)||50,000||5,000|
|Total increase in earnings and profits||9,000|
|Decrease in earnings and profits - under section 312(b)(1)(B)(i)||$55,000|
|Less: Liability assumed||35,000|
|Net amount of distribution (decrease in earnings)||20,000|
|Net decrease in earnings and profits||11,000|