Earnings and profits

Earnings and profits 162.1 Adjustment; tax refund from net operating loss carryback. Where an accrual method corporation sustains a net operating loss which results in a right to a tax refund due to the carryback of the net operating loss, the amount of the refund is reflected in the current earnings and profits available for payment of dividends in the year in which the net operating loss was sustained and the right to the refund arose. §1.312–6. (Sec. 312, ’86 Code.) Rev. Rul. 64-146, 1964-1 (Part 1) C.B. 129. 162.2 Allocation; consolidated tax liability. The Commissioner has granted the members of an affiliated group of corporations, which are variously engaged in distinctly different types of operations, permission to allocate their consolidated income tax liability in a manner which reflects the income of the various types of businesses in the group. Approval of a method proposed by a group of corporations must be obtained prior to the time required by law for tiling the consolidated return for the taxable year for which such method is to be used. (Sec. 1552, ’86 Code.) Rev. Rul. 57-392, 1957–2 C.B. 615. 162.3 Allocation; consolidated tax liability. In computing the earnings and profits of each member, an affiliated group filing a consolidated return may elect to allocate the consolidated tax liability to its members on the basis of the percentage of the total tax which the “hypothetical” tax of each member, if computed on a separate return, would bear to the total amount of the hypothetical taxes for all members of the group so computed. In such a computation, the amount of net operating loss deduction for each member shall equal the amount of net operating loss deductible had such member actually filed a separate return for the taxable year. Therefore, a net operating loss deduction of a member used in computing its hypothetical tax on a separate return basis shall not include the portion of such member’s loss sustained in a prior year which had been absorbed by the group or the member in computing actual tax liabilities for prior years. (Secs. 312, 1552; ’86 Code.) Rev. Rul. 66-374, 1966-2 C.B. 427. 162.4 Allocation; consolidated tax liability. An affiliated group’s allocation of consolidated tax liability among its members for other than Federal income tax purposes, under an intercompany agreement using a method that differs from the method provided in the group’s election under reg. 1.1502–33(d)(3), will not invalidate the group’s election. However, the adjustment to the earnings and profits of the members of the group for tax purposes must he determined in accordance with the election. §§1.1502–33, 1.1552–1. (Secs. 1502, 1552; ’86 Code.) Rev. Rul. 76-302, 1976-2 C.B. 257. 162.5 Allocation; consolidated tax liability; payments to members generating tax reductions. Tax consequences of an agreement entered into by members of an affiliated group that provided for allocation of the consolidated tax liability in accordance with section 1552(a)(2), computation of a hypothetical tax for each member on a separate return basis, and the payment, through the parent corporation, from members whose hypothetical tax was reduced to members whose losses or credits generated such reductions. §§1.316-1, 1.1552-1. (Secs. 316, 1552; ’86 Code.) Rev. Rul. 73-405, 1973-2 C.B. 109.

162.6 Bankruptcy; cancellation of indebtedness. The Service will not follow the Meyer decision holding that, in an arrangement under Chapter XI of the Bankruptcy Act, the cancellation of indebtedness exceeding the reduction of the basis of retained assets does not reduce the deficit in earnings and profits. §§1.61–12, 1.312-6, 1.316-1. (Secs. 61, 312, 316; ’86 Code.) Rev. Rul. 75-515, 1975-2 C.B. 117. 162.7 Bankruptcy; dividends by successor. Pursuant to a voluntary plan of reorganization under section 77B of the Bankruptcy Act, all the assets and earnings of B and C corporations were transferred to a successor corporation whose stock was acquired by the creditors of B and C to the exclusion of their stockholders. Held, the ac cumulated earnings of B and C corporations did not survive the section 77B reorganization and, thus, were not available to the successor corporation for the payment of dividends to its stockholders. (Secs. 112(b), 115(1), ’39 Code; Secs. 312, 361, 362, ’86 Code.) F. R. Humpage, 17 T.C. 1625, Acq., 1962-2 C.B. 4. 162.8 Bond premiums; tax-exempt bonds. A corporation that is not a dealer in securities must reflect an amortizable bond premium on wholly tax-exempt bonds it owns in its earnings and profits for the taxable year to which the premium is attributable together with the interest thereon. I.T. 3764 superseded. §§1.171-1, 1.312-6. (Secs. 171, 312; ’86 Code.) Rev. Rul. 71-165, 1971-1 C.B. 111. 162.9 Bond premiums and discounts. Amortizable premiums and discounts from bonds issued by a corporation are to he reflected in its earnings and profits in the same amount and in the same taxable year that they are properly includable or deductible in computing taxable income. There is no adjustment to earnings and profits available for payment of dividends for the amount of unamortized bond premiums or discounts in respect of bonds outstanding at the end of any taxable year. §§1.61-12, 1.312-6. (Secs. 61, 312; ’86 Code.) Rev. Rul. 66-35, 1966-1 C.B. 63. 162.10 Building and loan association; gains and losses from securities transactions. A building and loan association’s gains and losses from securities transactions are properly reflected in the earnings and profits of the year in which they were realized and recognized for tax purposes irrespective of where the net charge-off was recorded on the books of the association. §§1.312-6, 1.582–1, 1.593-10. (Secs. 312, 582, 593; ’86 Code.) Rev. Rul. 72–294, 1972-1 C.B. 101. 162.11 Carryover; foreign corporation; reorganization. The reorganization provisions of the 1954 Code are applicable in determining whether earnings and profits and basis will carry over upon the transfer of all of the assets of one foreign corporation to another foreign corporation. However, a special rule is provided where the transaction occurred prior to September 15, 1960. §§1.362–1, 1.367-1, 1.381(a)-1. (Secs. 362, 367, 381; ’86 Code.) Rev. Rul. 64-158, 1964-1 (Part 1) C.B. 140. 162.12 Computation; accelerated depreciation. The computation of the earnings and profits of each corporate member of a partnership is subject to the adjustments under section 312(k), and each corporate member is required to restore to its share of partnership earnings the excess of accelerated depreciation over straight line depreciation. §1.312-15. (Sec. 312, ’86 Code.) Rev. Rul. 79–20, 1979–1 C.B. 137.

162.13 Computation; additional taxes assessed for prior year. In computing earnings and profits currently available for dividends, additional Federal income taxes paid by a cash basis corporation for a prior year are deductible in the

Earnings and profits year of payment. G.C.M. 2951 superseded. §1.312-6. (Sec. 312, ’86 Code.) Rev. Rul. 70-609, 1970-2 C.B. 78.

account. Modified by Rev. Rul. 82–72. §§302–1, 1.312-5. (Secs. 302, 312; ’86 Code.) Rev. Rul. 76-266, 1974-1 C.B. 73.

162.14 Computation; advance payments included in income; accrual method. An accrual method taxpayer need not make any adjustment in computing its earnings and profits under section 312 for advance payments deferred under Rev. Proc. 71-21. §1.312-6. (Sec. 312, ’86 Code.) Rev. Rul. 79–68, 1979–1 C.B. 133.

162.21 Computation; distribution in redemption of stock. Increases in accumulated earnings and profits of a corporation for a taxable year ending on or before December 31, 1970, resulting solely from the retroactive application of Rev. Rul. 70-531, relating to the computation of earnings and profits available for distribution upon redemption of stock, will be disregarded for purposes of the accumulated earnings tax. Increases in the taxable portion of distributions received by shareholders prior to October 19, 1970, will be disregarded to the extent such increases result in adverse tax consequences. The disregarded portion reduces the adjusted basis of the shareholder’s stock. Rev. Rul. 70–531 modified. §§1.312–1, 1.531-1, 301.7805-1. (Secs. 312, 531, 7805; ’86 Code.) Rev. Rul. 73-550, 1973-2 C.B. 108.

group; 162.15 Computation; affiliated deemed dividend election. An example is provided for computing the earnings and profits available for distribution during the taxable year by a parent corporation, its wholly owned subsidiary, and the subsidiary’s wholly owned subsidiary all filing a consolidated return and electing the reg. deemed dividend provisions of 1.1502–32(f)(2). §§1.316–1, 1.1502–32. (Secs. 316, 1502; ’86 Code.) Rev. Rul. 75–212, 1975–1 C.B. 107.

162.22 Computation; distribution in redemp162.16 Computation; capital loss carryover. tion of stock and ordinary dividends. Examples A capital loss carryover does not reduce the earn- illustrate the methods of determining the pro rata ings and profits of a taxable year available for the portion of the total earnings and profits attributpayment of dividends by a regulated investment able to shares redeemed during a taxable year in a company or a real estate investment trust, but it situation in which the current year’s earnings and does reduce the amount of a dividend that maybe profits exceed the ordinary distributions made and designated as a capital gain dividend. §§1.312-6, in a situation in which the opposite occurs. §§1.312-5, 1.316-1. (Secs. 312, 316; ’86 Code.) 1.316-1, 1.8524, 1.852-5, 1.857-4, 1.857-5. Rev. Rul. 74-338, 1974-2 C.B. 101. (Secs. 312, 316, 852, 857; ’86 Code.) Rev. Rul. 76-299, 1976-2 C.B. 211. 162.23 Computation; distribution in redemp162.17 Computation; change in accounting tion of stock and ordinary dividends. When both method; section 481 adjustment. A corporation ordinary distributions under section 301 of the that obtains permission to change its method of Code and redemption distributions under section accounting and is subject to a section 481(a) 302 are made during the same taxable year and disadjustment shall, when computing its earnings and tributions exceed earnings and profits for the year, profits available for the payment of dividends, fol- the ordinary distributions take priority in deterlow its new method for reporting taxable income mining current earnings available for dividends. and shall take the adjustment into account over the Only current earnings in excess in the ordinary same period as it does for purposes of computing distributions are treated as available for redemptaxable income. §§1.312–6, 1.446-1, 1.481–1. tion distributions. §§1.301–1, 1.312-5, 1.316–1. (Sec. 601.602, S.P.R.; Secs. 312, 446, 481, ’86 (Secs. 301, 312, 316; ’86 Code.) Rev. Rul. 76-339, 1974-2 C.B. 103. Code.) Rev. Proc. 79-47, 1979-2 C.B. 528. 162.24 Computation; distribution of install162.18 Computation; charitable contribu- ment obligations. Gain was recognized under tion. The Service will not follow the Jacob M. section 453(d) by a corporation at the time it disKaplan decision concerning a corporation that tributed, as dividends to its two corporate sharemakes a charitable contribution of appreciated holders, installment obligations acquired in prior property. The corporation may reduce its current years upon the sale of land used in its business with earnings and profits only by the adjusted basis of outstanding balances greater than fair market the donated property, even though in computing its value and fair market value greater than basis. The taxable income it may deduct an amount equal to recognition of gain will not result in (1) an increase the property’s fair market value. §§1.170A-1, in the amount of the distribution under section 1.312-1. (Secs. 170, 312; ’86 Code.) 301(b)(1)(B)(ii), (2) an increase in the basis of the Rev. Rul. 78-123, 1978-1 C.B. 87; Jacob M. obligations in the hands of the shareholders under section 301(d)(2)(B), or (3) adjustment of the Kaplan, 43 T.C. 580, Nonacq., 1978-1 C.B. 2. decrease in earnings and profits under section 162.19 Computation; deemed distribution. 312(c)(3). Further, collection of the unpaid balThe amount of the deemed distribution of a corpo- ance results in gain to the shareholders. 1.312-1, 1.453-9. (Secs. 301, 312, ration’s stock under section 305(c) resulting from §§1.301-1, . the increase in the conversion ratio of convertible 453; ’86 Code.) Rev. Rul. 74-337, 1976-2 C.B. 94. debentures reflecting cash dividends paid on common stock, the sum of the cash and deemed distribution being less than the corporation’s earn162.25 Computation; effect of estimated tax ings and profits for the year, increases the basis of payments. A corporation filing its federal income the debentures in the hands of the holders and tax return on a calendar year basis and using the decreases the earnings and profits of the corpora- cash receipts and disbursements method of tion. §§1.301–1, 1.312–1. (Secs. 301, 312; ’86 accounting must apply its estimated tax payments Code.) required under section 6154 to reduce its earnings Rev. Rul. 76-186, 1976–1 C.B. 86. and profits in the year paid irrespective of the ultimate federal income tax liability. If a refund is 162.20 Computation; distribution in redemp- received in the following year, the corporation tion of preferred stock. Dividend arrearages paid must increase its earning and profits by the amount upon redemption of preferred stock are chargeable of the refund for the year in which it is received, to earnings and profits. However, the costs of and, if additional tax is paid in the following year, redemption, including any premium paid and the corporation must reduce its earnings and profexpenses incurred in connection with the redemp- its by the additional amount. §1.312-4. (Sec. 312. tion, are not chargeable to earnings and profits but ’86 Code.) Rev. Rul. 79-69, 1979-1 C.B. 134. a chargeable under section 312(e) to the capital

162.26 Computation; effect of investment credit. In computing earnings and profits for the year, taxpayers must reduce their income tax liability by the amount of investment credit allowable and may not take into account the resultant adjustment to basis. Amplified by Rev. Rul. 66-336. (Secs. 38, 48; ’86 Code.) Rev. Rul. 63-63, 1963-1 C.B. 10. 162.27 Computation; effect of investment credit. Where an accrual-method corporation is allowed an investment credit, its earnings and profits for the taxable year are determined in accordance with prescribed guidelines relating to (1) reductions attributable to income taxes and to depreciation on section 38 property; (2) income tax refunds for prior years arising from investment credit carry backs; and (3) adjustments or restorations to basis. Rev. Rul. 63-63 amplified. §§1.38-1, 1.48-7, 1.312-6. (Secs. 38, 48, 312; ’86 Code.) Rev. Rul. 66-336, 1966–2 C.B. 110. 162.28 Computation; redemption of preferred stock that is section 306 stock. The charge to earnings and profits computed under section 312(a) on the redemption under section 303 of section 306 stock is subject to the limitation of section 312(e). Therefore, a portion of the redemption price must be allocated to the capital account. Rev. Rul. 74-266 modified. §§1.303-2, 1.306-1, 1.312-1. (Secs. 303, 306, 312; ’86 Code.) Rev. Rul. 82-72, 1982-1 C.B. 57. 162.29 Computation; redemption of stock. The portion of a distribution in redemption of stock that is properly chargeable to the capital account and not treated as a distribution of earnings and profits includes not only the allocation portion of the capital paid in for stock at its tax basis but also the pro rata share of the other attributes including unrealized appreciated corporate surplus. (Secs. 302, 303, 312, 316, 346, 562; ’86 Code.) Woodward Investment Co., 46 B.T.A. 648, and F & R Lazarus & Co., 1 T.C. 292, Acqs. in result, 1970-2 C.B. xx-xxii; Herbert Enoch, 57 T.C. 781, Nonacq., 1974-1 C.B. 2. 162.30 Computation; redemption of stock. For purposes of determining the portion of a redemption distribution described in section 302(b) that is properly chargeable to the capital account of a corporation incorporated after March 1, 1913, the ratio between the charge to capital and the capital prior to retirement is the same as the ratio between the number of shares retired and the number of shares outstanding prior to retirement, and the balance of the redemption distribution is charged to earnings and profits. Rev. Rul. 70-531 revoked. §§1.302–1, 1.303–1, 1.312–5, 1.316-2. (Secs. 302, 303, 312, 316; ’86 Code.) Rev. Rul. 79–376, 1979–2 C.B. 133; William D.P. Jarvis, 43 B.T.A. 439, Nonacq. withdrawn and Acq. substituted; Ronald D. Anderson, 67 T.C. 522, Acq., 1979-2 C.B. 1. 162.31 Computation; useful life of depreciable assets. A corporation may not use a remaining useful life for a particular asset, to compute straight-line depreciation for earnings and profits purposes, that is different from the remaining useful life used to compute its taxable income. §§1.167(a)-1, 1.312-15. (Secs. 167, 312; ’86 Code.) Rev. Rul. 76-12, 1976-1 C.B. 91. 162.32 Consolidated return; allocation of tax liability; net operating loss carryback. An affiliated group that filed consolidated returns for the years 1970-73 and elected to allocate its consolidated tax liability sustained a net operating loss in 1973 attributable in part to a subsidiary that was organized and joined the group in 1973. That portion of the loss attributable to the newly organized subsidiary may be included in the 1973 consoli-

Earnings and profits dated net operating loss carryback and the tax refunds thus generated may be allocated, for purposes of determining earnings and profits available for payment of dividends, to the members who generated the tax liability in the respective carrvback years. §§1.1502–79, 1.1552–1. (Secs. 1502, 1552; ’86 Code.) Rev. Rul. 74-423, 1974-2 C.B. 289. 162.33 Consolidated return; intercompany distribution of securities. The distribution of portfolio securities as a dividend by a wholly owned subsidiary to its parent during a consolidated return period is an intercompany transaction. The amount of the dividend to the parent and the basis of the securities in the hands of the parent is the adjusted basis of the securities in the hands of the subsidiary immediately before the distribution. Adjustment of earnings and profits is made between the subsidiary and the parent. §§1.301-1, 1.312-7, 1.312-11, 1.316-1, 1.1502-31A, 1.1502–38A. (Secs. 301, 312, 316, 1502; ’86 Code.) Rev. Rul. 65-110, 1965-1 C.B. 438.

162.38 Controlled foreign corporation; exchange of stock; election of alternative accounting method. A written statement filed on July 14, 1967, on behalf of a controlled foreign corporation by its U.S. shareholders to elect certain alternative accounting methods and practices regarding exploration and development expenses incurred prior to November 1, 1963, was timely filed under reg. 1.964-1(c)(6) with respect to an exchange of stock made on July 17, 1967 which required the determination of the corporation’s earnings and profits. §§1.964–1, 1.1248–1. (Secs. 964, 1248; ’86 Code.) Rev. Rul. 74-272, 1974–1 C.B. 192. 162.39 Controlled foreign corporation; exclusion of previously taxed earnings and profits. The earnings and profits of a controlled foreign corporation must be adjusted to reflect the distribution of property to its domestic shareholder in a situation in which the property has an adjusted basis greater than its fair market value on the date of its distribution. §§1.312–1, 1.959–2. (Secs. 312, 959; ’86 Code.) Rev. Rul. 86-131, 1986–2 C.B. 135.

162.34 Controlled foreign corporation. The 162.40 Controlled foreign corporation; illebasis of the stock of a controlled foreign corpora- gal payments. Contributions to foreign political tion in the hands of its domestic parent is not parties and payments to foreign government offireduced by amounts excluded from the parent’s cials, as described in section 162(c), that are made gross income under section 959(a)(2) and such before November 4, 1976, although not deductible amounts do not increase the controlled foreign in computing taxable income, reduce the earnings corporation’s earnings and profits for purposes of and profits of a controlled foreign corporation. section 1248. §§1.951–1, 1.959–1, 1.961–1, §§1.162-18, 1.312-6, 1.964-1. (Secs. 162, 312, 1.961-2, 1.1248-2, 1.1248-3. (Secs. 951, 959, 964; ’86 Code.) 961, 1248; ’86 Code.) Rev. Rul. 77-442, 1977-2 C.B. 264. Rev. Rul. 76-539, 1976-2 C.B. 232. 162.41 Controlled foreign corporation; less 162.35 Controlled foreign corporation; accel- developed country. The exclusion under section 1248(d)(3) is applicable with respect to any taxerated depreciation election. A corporation attempted to elect accelerated depreciation to able year in which a controlled foreign corporation compute the earnings and profits of wholly owned is a “less developed country” corporation. There foreign subsidiaries by attaching statements of the is no requirement that the controlled foreign corelection to its returns, rather than by filing separate poration be a less developed country corporation written statements with the Service’s Office of for all years during which it is a controlled foreign International Operations as required by reg. corporation for the exclusion to apply. The excess 1.964-1(c)(3)(ii). The statements, alone, were of the recognized gain from a distribution from a insufficient but, when added to the returns, con- foreign corporation, which is treated as a sale or tained all the information required by the regula- exchange of stock in such foreign corporation tions. Held, the elections were in substantial com- under section 331, over the amount included in pliance with the regulations and were valid. gross income as a dividend under section 1248(a) is treated as a gain from the sale or exchange of a §1.964-1. (Sec. 964, ’86 Code.) Hewlett-Packard Co., 67 T.C. 55, Acq. in result, capital asset where such stock is a capital asset in the hands of the shareholder. (§§1.1221-1, 1979-1 C.B. 1. 1.1248-3. (Secs. 1221, 1248; ’86 Code.) Rev. Rul. 68-187, 1968-1 C.B. 367. 162.36 Controlled foreign corporation; basis of depreciable assets. For purposes of determin- 162.42 Controlled foreign corporation; loss ing the basis of depreciable assets as of the first on sale of subsidiary’s stock. For purposes of secday of a controlled foreign corporation’s first tion 952(c), the earnings and profits of a controlled post-1962 taxable year, the corporation (or its con- foreign corporation should be reduced by the full trolling U.S. shareholder on its behalf) may (1) amount of a loss realized on the sale, made for a continue to use the method actually utilized for the valid business reason and at fair market value, of purpose of accounting to its shareholders if such the voting stock in its own foreign subsidiary to method is sanctioned by section 167 and the regu- either a related or an unrelated party. §§1.312–7, lations thereunder, (2) adopt a straight-line 1.964-1, 1.1211-1. (Secs. 312, 964, 1211; ’86 method, or (3) adopt the same method of depreci- Code.) ation that the corporation adopts for its post-1962 Rev. Rul. 77-369, 1977-2 C.B. 263. taxable year. §§1.167(b)–0, 1.952–1, 1.957–1, 1.963-1, 1.964-1. (Secs. 167, 952, 957, 963, 964; 162.43 Controlled foreign corporation; sec’86 Code.) tion 1248 stock. The earnings and profits of FS2, Rev. Rul. 66-19, 1966-1 C.B. 178. a foreign subsidiary of FS1, a foreign corporation, that were accumulated from 1964 to the date of 162.37 Controlled foreign corporation; divi- FS1’s sale by P, the domestic parent of FS1, are dend from CFC within same chain of owner- deemed to be included with all the earnings and ship. For purposes of calculating the limitation on profits of FS1 for purposes of applying section subpart F income under section 952(c), a con1248(a) and (c)(2) to P’s gain on the sale ofFS1. trolled foreign corporation (CFC) that receives a §§1.958-1, 1.1248-1. (Secs. 958, 1248; ’86 dividend distribution from another CFC within Code.) ownership is required to increase its earnings and Rev. Rul. 84–72, 1984-1 C.B. 182. profits for the tax year by the amount of the distribution. §§1.312-1, 1.951–1, 1.952-1, 1.954–1, 162.44 Cooperatives; liquidation; revolving 1.958-1, 1.964-1. (Secs. 312, 951, 952, 954, 958, fund agreement. Where an exempt growers’ marketing cooperative association, pursuant to a 964; ’86 Code.) Rev. Rul. 86-33, 1986-1 C.B. 287. revolving fund agreement, each year retains por-

tions of the amounts due growers for crops and issues stoc growers report the face amount of the stock received as part of income from crops each year, the value of the stock does not represent earnings and profits of the association upon its liquidation. §39.112(b)(7)-4. (Sec. 112(b), ’39 Code; Sec. 333, ’86 Code.) Rev. Rul. 54-244, 1954–1 C.B. 104. 162.45 Dividend distribution date; taxable status and effect. The date of payment, rather than the date of declaration, constitutes the date of distribution of a dividend. Accordingly, the taxable status of a distribution and its effect on the earnings and profits of the declaring corporation will be determined by reference to the earnings and profits of the corporation for the taxable year of payment, if the distribution is out of current earnings and profits, or on the date of payment if the distribution is out of accumulated earnings and profits. §§39.115(a)-1, 39.115(b)-1, 1.301-1, 1.312-6, 1.316-1. (Secs. 115(a), 115(b), ’39 Code; Secs. 301, 312, 316, ’86 Code.) Rev. Rul. 62–131, 1962-2 C.B. 94. 162.46 Effect of investment credit and net operating loss. An accrual method corporation’s current earnings and profits for 1973 must reflect the total of the refunds from both a 1973 net operating loss carryback to 1970 and the resulting unused investment credit carryback to 1967. The part of the 1970 unused investment credit carried back from 1972 can not be carried back to 1967 and becomes a carryover having no effect on earnings and profits until utilized. The earnings and profits for 1967, 1970, and 1972 are not affected by the carrybacks. Rev. Rul. 66–336 modified. §§1.38-1, 1.46-2, 1.312-6. (Secs. 38, 46, 312; ’86 Code.) Rev. Rul. 75-153, 1975–1 C.B. 106. 162.47 Excess distributions. Common shareholders received a dividend exceeding the corporation’s earnings and profits. Two days later a 94-percent shareholder paid an amount equaling the total dividend to the corporation’s capital surplus. Held, the first distribution was a taxable dividend exchanging earned surplus; the contribution was not a dividend remission as argued by the Commissioner; therefore, the subsequent distribution was not a taxable dividend from earnings. (Sec. 115(a), ’39 Code; Sec. 316, ’86 Code.) Carl W. Lundeen, 33 T.C. 19, Acq., 1961-1 C.B. 4. 162.48 Excess distributions. If total distributions for all classes of stock are in excess of earnings and profits, dividends must be regarded as having been distributed to those stockholders having priority under corporate charter before any distributions may be made to stockholders with lesser priority. G.C.M. 21122 superseded. §1.316-2. (Sec. 316, ’86 Code.) Rev. Rul. 69-440, 1969–2 C.B. 46. 162.49 Foreign subsidiary; distributions of appreciated property. Effect of distributions of appreciated property by a foreign subsidiary to its domestic corporate shareholder on the computation of the credit for foreign taxes deemed paid by the domestic corporation. §§1.301–1, 1.312-1, 1.902-3. (Secs. 301, 312, 902; ’86 Code.) Rev. Rul. 71-65, 1971-1 C.B. 212. 162.50 Foreign subsidiary; distributions of appreciated property. The amount of a distribution of a dividend of appreciated property by a foreign corporation to its domestic parent to be taken into account for the purposes of computing the deemed paid foreign tax credit under section 902(a) will be the fair market value of the property at the time of distribution. However, the earnings and profits of the distributing corporation will be reduced by the adjusted basis of the property. §§1.301-1, 1.312-1, 1.902-1. (Secs. 301, 312, 902; ’86 Code.) Rev. Rul. 77-483, 1977–2 C.B. 244.

Earnings and profits 162.51 Fraud penalties; accrued as liability. In determining the amount of an accrual basis corporation’s earnings and profits available for dividends, each fraud addition to a deficiency for which a corporation is held liable must be deducted from earnings and profits in the year it filed the addition applies whether or not contested. Rev. Rul. 107 revoked. §§29.43-2, 29.115-3, 1.312-6 (Secs. 43, 115, ’39 Code; Secs. 312, 461, ’86 Code.) Rev. Rul. 57–332, 1957–2 C.B. 231; Esther M. Stein, 25 T.C. 940, Acq., 1957-2 C.B. 7.

162.59 Liquidation; transfer of assets. An individual who owns nineteen percent of the outstanding stock of a corporation which meets the requirements for liquidation under section 333 is entitled to the benefits of that section, even though an excluded corporation owns the remaining stock. The liquidation will also meet the requirements of section 332 as to distribution of the remaining assets to the majority stockholder. The earnings and profits at the time of liquidation, which are properly applicable to the assets distributed to the acquiring corporation, will become earnings and profits of the latter corporation under 162.52 Gain on sale of assets in a liquidation. section 381 of the Code. §§1.332–1, 1.333–1, Realized but unrecognized gain from the sale of a 1.334-1, 1.336-1. (Secs. 332, 333, 334, 336, 381; corporation’s assets pursuant to a plan of liquida- ’86 Code.) Rev. Rul. 56-212, 1956-1 C.B. 170. tion does not serve to increase the corporation’s earnings and profits for the year. §§1.312–7, 162.60 Liquidation; transfer of assets; sole 1.337-1. (Secs. 312, 337; ’86 Code.) stockholder-creditor. Gain is recognized by a Rev. Rul. 76-239, 1976-1 C.B. 90. corporation in a liquidation under section 333 with 162.53 Interest on contested deficiencies. In respect to appreciated property distributed by the determining an accrual corporation’s earnings and corporation to its sole shareholder-creditor section profits available for dividends, interest on de 267 loss is not recognized by the corporation with ficiencies determined was allowed to be ratably respect to depreciated property similarly distribaccrued for the deficient years rather than in a uted. The earnings and profits of the corporation lump sum for the year the deficiency was deter- are increased by the gain realized and decreased mined. (Sec. 115(a), ’39 Code; Secs. 301, 316, ’86 by the loss realized and the income taxes incurred. §1.333-4. (Sec. 333, ’86 Code.) Code.) Rev. Rul. 76-175, 1976-1 C.B. 92. Sidney Stark, 29 T.C. 122, Nonacq., 1961-1 C.B. 4. 162.61 Livestock investment program; cattle breeding service agreements.A limited partner162.54 Inventory assets; farmers; breeding ship that expended amounts pursuant to an agreelivestock. Livestock raised and purchased for ment, under which the seller offered to sell cattle breeding purposes, the cost of which is properly to the partnership for a specified amount plus a capitalized and depreciated rather than included in monthly maintenance fee and the partnership inventory, are not inventory assets under section could cancel the agreement at any time is not per312(b). §§1.61-4, 1.312-2, 1.471-6. (Secs. 61, mitted to deduct the maintenance fee for periods 312, 471; ’86 Code.) prior to the date the cattle were purchased. Rev. Rul. 79-149, 1979-1 C.B. 132. §§1.162-12, 1.263(a)-1. (Secs. 162, 263; ’86 Code.) 162.55 Life insurance companies. A life insurRev. Rul. 84-35, 1984-1 C.B. 31 ance company’s taxable income should not be adjusted in the computation of current earnings 162.62 Merger; stock for stock and appreand profits to include 50 percent of the excess of ciated property. Tax consequences in a merger the company’s gain from operations over its tax qualifying as a reorganization where a corporate able investment income that is not included in tax- shareholder of the acquired corporation receives able income under section 802(b)(2). §§1.312–6, stock and appreciated property of the acquiring 1.446-1, 1.802-4, 1.815–2. (Secs. 312, 446, 802, corporation in exchange for its stock and the proper method for determining earnings and prof815; ’86 Code.) its to both the transferor and transferee corporaRev. Rul. 79-164, 1979-1 C.B. 135. tions are set forth. §§1.243–1, 1.312–1, 1.356–1, 162.56 Life insurance companies. A life insur- 1.358–1, 1.361–1, 1.362–1, 1381(c)(2)-1. (Secs. ance company’s taxable income should not be 243, 312, 356, 358, 361, 362, 381; ’86 Code.) Rev. Rul. 72-321, 1972–2 C.B. 197. increased in the computation of current earnings and profits by amounts representing the special deductions allowed under section 809(d)(5) and 162.63 Natural gas corporation; accounting (6). §§1.312-6, 1.446-1, 1.809–5, 1.815–2. (Secs. method. A natural gas company which is required by the Federal Power Commission to capitalize on 312, 446, 809, 815; ’86 Code.) its books interest, taxes and intangible drilling and Rev. Rul. 79-165, 1979–1 C.B. 136. development costs, but which deducted them for can deduct them in computing earn162.57 Life insurance companies; redemp- tax purposes, and profits. §1.312–6. (Sec. 312, ’86 Code.) tion of deceased shareholder’s stock. A distribu- ings Rev. Rul. 60-123, 1960-1 C.B. 145. tion by a stock life insurance company to a deceased shareholder’s estate that qualifies as a 162.64 Public utilities; contributions in aid of redemption under section 303, made in part from construction. The earnings and profits of a reguthe policyholders surplus account under the provi- lated public utility shall not reflect contributions sions of section 815(a), is fully includable as to that received in aid of the construction of facilities to part in the company’s taxable income under sec- extend its services, but shall reflect any gain tion 802(b)(3) before applying section 312(e) to includible in taxable income upon the disposition determine the allocation of the distribution to the of such facilities; depreciation may not be claimed company’s earnings and profits account and its for such purposes except to the extent that the concapital account. §§1.312–5, 1.815–2. (Secs. 312, tributions were included in taxable income. Modi815; ’86 Code.) fied by Rev. Rul. 75-557. §§1.312-4, 1.316-1. Rev. Rul. 74-569, 1974–2 C.B. 193. (Secs. 3l2, 316; ’86 Code.) Rev. Rul. 66-353, 1966-2 C.B. 111. 162.58 Liquidation; distribution of appreciated property. Section 312(b) of the Code, as 162.65 Redemption of stock with insurance amended by the Tax Reform Act of 1986, is inap- proceeds. The redemption of a portion of capital plicable to distributions that are made as a part of stock of a corporation held by the estate of a a section 333 liquidation. Section 312(b) and (c), deceased stockholder, pursuant to an agreement as in effect prior to the Act, continue to apply to whereby the proceeds of life insurance policies will be used by the corporation to redeem the capisuch liquidations. (Sec. 312, ’86 Code.) tal stock held by his estate, in case of death, will Rev. Rul. 87–1, 1986–1 C.B. 132.

constitute a partial liquidation. The total amount received by the estate upon surrender of the stock will be treated as payment in exchange for the stock and gain or loss will be capital gain or loss. The excess of the insurance proceeds received by the corporation over the sum of the premiums paid will constitute earnings and profits available for distribution. §39.115(c)-1. (Sec. 115(c), ’39 Code; Sec. 331, ’86 Code.) Rev. Rul. 54–230, 1954-1 C.B. 114. 162.66 Reflection of gain on sale of property acquired by foreclosure. Amounts realized upon the sale of real property previously acquired by foreclosure by a domestic building and loan association using the reserve method of computing bad debts, which are in excess of the adjusted basis of such property and are credited to the appropriate bad debt reserve account, in accordance with reg. 1.595–1(e)(6)(i), would not be reflected in earnings and profits accounts of the taxable year of sale or in accumulated earnings and profits accounts after 1951. However, such amounts would be reflected in gross income if, in any year, the bad debt reserve account is required to be restored to gross income. §§1.312-6, 1.593-7, 1.595-1. (Secs. 312, 593, 595; ’86 Code.) Rev. Rul. 70-256, 1970–1 C.B. 69. 162.67 Small Business corporation; disallowed accrued bonus. A shareholder of an electing Small Business corporation must include in gross income his pro rata share of a disallowed accrued bonus, with a corresponding increase in the basis of his stock, since the undistributed taxable income of the corporation is increased as the result of the disallowance. Further, payment of the bonus in a subsequent year will not reduce the current earnings and profits of the corporation for that year. Such payment will reduce the accumulated earnings and profits. §§1.267(a)–1, 1.1376-1, 1.1377–2. (Secs. 267, 1376, 1377; ’86 Code.) Rev. Rul. 70-306, 1970-1 C.B. 179. 162.68 Small Business corporation; prior to reorganization. An election under section 1372 is not terminated with respect to the taxable year in which an electing Small Business corporation undergoes reorganization within the meaning of section 368(a)(1)(C). Distributions made by the corporation to its stockholders of the estimated earnings and profits of the current year prior to the reorganization represent distributions of undistributed taxable income and not gain under section 356(a)(1). §§1.316-1, 1.356-1, 1.1372-1, 1.1375-6. (Secs. 316, 356, 1372, 1375; ’86 Code.) Rev. Rul. 71–266, 1971–1 C.B. 262. 162.69 Spin-off reorganization. Under a reorganization plan, a corporate business issued two new classes of common stock in exchange for existing common shares and transferred assets located in two states to a new corporation in exchange for the latter’s common stock. New corporate stock was distributed to the old corporation’s shareholders. The accumulated earnings and profits of the old corporation should be allocated between such corporation and the new corporation. §§1.306-1, 1.312-1, 1.355-1, 1.361-1, 1.368-2. (Secs. 306, 312, 355, 361, 368, 1032; ’86 Code.) Rev. Rul. 56-344, 1956-2 C.B. 195. 162.70 Stock; basis; affiliated group; deposits under Merchant Marine Act. A wholly owned subsidiary’s earnings and profits deposited, pursuant to section 607 of the Merchant Marine Act of 1936, into statutory reserve funds that were in existence on or before the effective date of the Merchant Marine Act of 1970 may not be used, under reg. 1.1502–32, to increase the parent’s basis for determining gain or loss in the stock of the subsidiary with which it has always filed consolidated tax returns. §§1.312–6, 1.1502–32. (Sec. 312, 1502; ’86 Code.) Rev. Rul. 77-284, 1977-2 C.B. 97.

162.71 Stock rights; acquisition in another corporation. The pro rata distribution by a corporation to its shareholders of short-term transferable rights to acquire stock of another corporation is taxable under section 301 when the rights are distributed. Further, consequences relating to basis, capital gains and losses, and earnings and profits which result from the taxable event, are explained. 1.311-1, 1.312-1, §§1.301-1, 1.317-1, 1.1234-1. (Secs. 301, 311, 312, 317, 1234; ’86 Code.) Rev. Rul. 70-521, 1970-2 C.B. 72. 162.72 Tax-exempt income; accumulation; reasonable needs of business.Tax-exempt interest income earned by a corporation during any given taxable year in which it is subject to the accumulated earnings tax is not includable in the corporation’s accumulated taxable income. However, such interest income is includible in earnings and profits for purposes of determining whether the corporation has permitted accumulation beyond the reasonable needs of the business. §§1.531-1, 1.533-1. (Secs. 531, 533; ’86 Code.) Rev. Rul. 70-497, 1970-2 C.B. 123. 162.73 Taxable status of distributions. Instructions and guidelines are set forth relating to the determination of the taxable status of corporate distributions and the supporting information to be furnished to the Service. Rev. Procs. 65–10 and 67-12 superseded. §§1.301-1, 1.316-1, 1.333-1, 1.6042-2. (Sec. 601.602, S.P.R.; Secs. 301, 316, 333, 6042, ’86 Code.) Rev. Proc. 75-17, 1975-1 C.B. 677. 162.74 Taxable status of distributions; bank’s subsidiary. The distribution by a national bank of the stock of a wholly owned subsidiary to a trust created for the purpose of holding the stock for the pro rata benefit of shareholders of the bank with control vested in the majority of such shareholders constitutes a taxable dividend to the extent of earnings and profits of the bank available for dividends even though the disposition of the stock is tied to existing stock ownership in the bank. §39.115(a)-1. (Sec. 115(a), ’39 Code; Sec. 316, ’86 Code.) Rev. Rul. 54-140, 1954-1 C.B. 116. 162.75 Taxable status of distributions; dividends. Examples illustrate the treatment of a distribution as a taxable dividend, reduction in basis of stock, or capital gain applying the principles for the source of a distribution under reg. 1.316-2(a). §1.316-2. (Sec. 316, ’86 Code.) Rev. Rul. 74-164, 1974–1 C.B. 74.