Distributions to Shareholders This section discusses corporate distributions of money, stock, orother property to a shareholder with respect to the shareholder'sownership of stock. However, this section does not discuss the specialrules that apply to the following distributions. Distributions in redemption of stock. Distributions in complete liquidation of thecorporation. Distributions in corporate organizations andreorganizations. Certain distributions to 20% corporate shareholders. Money or Property Distributions Most distributions are in money, but they may also be in stock orother property. For this purpose, "property" generally does notinclude stock in the corporation or rights to acquire this stock.However, see Distributions of Stock or Stock Rights, later. A corporation generally does not recognize a gain or loss on thedistributions covered by the rules in this section. However, seeGain from property distributions, later. Amount distributed.The amount of a distribution is generally the amount of any moneypaid to the shareholder plus the fair market value (FMV) of anyproperty transferred to the shareholder. However, this amount isreduced (but not below zero) by the following liabilities. Any liability of the corporation the shareholder assumes inconnection with the distribution. Any liability to which the property is subject immediatelybefore, and immediately after, the distribution. The FMV of any property distributed to a shareholder becomesthe shareholder's basis in that property. Gain from property distributions.A corporation will recognize a gain on the distribution of propertyto a shareholder if the FMV of the property is more than its adjustedbasis. This is generally the same treatment the corporation wouldreceive if the property were sold. However, for this purpose, the FMVof the property is the greater of the following amounts. The actual FMV. The amount of any liabilities the shareholder assumed inconnection with the distribution of the property. If the property was depreciable or amortizable, the corporation mayhave to treat all or part of the gain as ordinary income fromdepreciation recapture. For more information on depreciation recaptureand the sale of business property, see Publication 544. Distributions of Stockor Stock Rights Distributions by a corporation of its own stock are commonly knownas stock dividends. Stock rights (also known as "stock options")are distributions by a corporation of rights to acquire its stock.Distributions of stock dividends and stock rights are generallytax-free to shareholders. However, stock and stock rights are treatedas property under the rules discussed earlier if any of the followingapply to their distribution. Any shareholder has the choice to receive cash or otherproperty instead of stock or stock rights. The distribution gives cash or other property to someshareholders and an increase in the percentage interest in thecorporation's assets or earnings and profits to othershareholders. The distribution is in convertible preferred stock and hasthe same result as in (2). The distribution gives preferred stock to some common stockshareholders and gives common stock to other common stockshareholders. The distribution is on preferred stock. (An increase in theconversion ratio of convertible preferred stock made solely to takeinto account a stock dividend, stock split, or similar event thatwould otherwise result in reducing the conversion right is not adistribution on preferred stock.) For this purpose, the term "stock" includes rights toacquire stock and the term "shareholder" includes a holder ofrights or convertible securities. Constructive stock distributions.You must treat certain transactions that increase a shareholder'sproportionate interest in the earnings and profits or assets of acorporation as if they were distributions of stock or stock rights.These constructive distributions are treated as property if they havethe same result as a distribution described in (2), (3), (4), or (5)of the above discussion. This treatment applies to a change in your stock's conversion ratioor redemption price, a difference between your stock's redemptionprice and issue price, a redemption that is not treated as a sale orexchange of your stock, and any other transaction having a similareffect on a shareholder's interest in the corporation. Expenses of issuing a stock dividend.You cannot deduct the expenses of issuing a stock dividend. Theseinclude printing, postage, cost of advice sheets, fees paid totransfer agents, and fees for listing on stock exchanges. Thecorporation must capitalize these costs. Constructive Distributions The following sections discuss some transactions that may betreated as distributions. Below-market loans.If a corporation gives a shareholder a loan on which no interest ischarged or on which interest is charged at a rate below the applicablefederal rate, the interest not charged may be treated as adistribution to the shareholder. For more information, seeBelow-Market Loans under Income and Deductions,earlier. Corporation cancels shareholder's debt.If a corporation cancels a shareholder's debt without repayment bythe shareholder, the amount canceled is treated as a distribution tothe shareholder. Transfers of property to shareholders for less than FMV.A sale or exchange of property by a corporation to a shareholdermay be treated as a distribution to the shareholder. For a shareholderwho is not a corporation, if the FMV of the property on the date ofthe sale or exchange exceeds the price paid by the shareholder, theexcess may be treated as a distribution to the shareholder. Unreasonable rents.If a corporation rents property from a shareholder and the rent isunreasonably more than the shareholder would charge to a stranger foruse of the same property, the excessive part of the rent may betreated as a distribution to the shareholder. For more information,see chapter 7 in Publication 535. Unreasonable salaries.If a corporation pays an employee who is also a shareholder asalary that is unreasonably high considering the services actuallyperformed by the shareholder-employee, the excessive part of thesalary may be treated as a distribution to the shareholder-employee.For more information, see chapter 2 in Publication 535. Reporting Dividends and Other Distributions A corporate distribution to a shareholder is generally treated as adistribution of earnings and profits. Any part of a distribution fromeither current or accumulated earnings and profits is reported to theshareholder as a dividend. Any part of a distribution that is not fromearnings and profits is applied against and reduces the adjusted basisof the stock in the hands of the shareholder. To the extent thebalance is more than the adjusted basis of the stock, the shareholderhas a gain (usually a capital gain) from the sale or exchange ofproperty. TaxTip: For more information about earnings and profits, see theWorksheet for Figuring Current Year Earnings and Profits inthe Form 5452 instructions. For information on shareholder reporting of corporatedistributions, see Publication 550, Investment Income andExpenses. Form 1099-DIV.File Form 1099-DIV with the IRS for each shareholder to whomyou have paid dividends and other distributions on stock of $10 ormore during a calendar year. You must generally send Forms1099-DIV to the IRS with Form 1096 by February 28 (March 31 if filingelectronically) of the year following the year of the distribution.For more information, see the instructions for Forms 1099, 1098, 5498,and W-2G. Generally, you must furnish Forms 1099-DIV to shareholders byJanuary 31 of the year following the close of the calendar year duringwhich the corporation made the distributions. However, you may furnishthem to shareholders after November 30 of the year of thedistributions if the corporation has made its final distributions forthe year. You may furnish them to shareholders after April 30 of theyear of the distributions if you furnish them with the finaldistributions for the calendar year. Backup withholding.Dividends may be subject to backup withholding at a 31% rate. Formore information on backup withholding, see the instructions for Forms1099, 1098, 5498, and W-2G. Form 5452.File Form 5452 if nondividend distributions were made toshareholders. A calendar tax year corporation must file Form 5452 with its incometax return for the tax year in which the nondividend distributionswere made. A fiscal tax year corporation must file Form 5452 with itsincome tax return due for the first fiscal year ending after thecalendar year in which the nondividend distributions were made. Current year earnings and profits.If a corporation's earnings and profits for the year (figured as ofthe close of the year without reduction for any distributions madeduring the year) are more than the total amount of distributions madeduring the year, all distributions made during the year are treated asdistributions of current year earnings and profits. If the totalamount of distributions is more than the earnings and profits for theyear, see Hoteles mas baratos StavangerAccumulated earnings and profits, later. Example.You are the only shareholder of a corporation that uses thecalendar year as its tax year. In January, you use the worksheet inthe Form 5452 instructions to figure your corporation's current yearearnings and profits for the previous year. During the year, thecorporation made four $1,000 distributions to you. At the end of theyear (before subtracting distributions made during the year), thecorporation had $10,000 of current year earnings and profits. Since the corporation's current year earnings and profits ($10,000)were more than the amount of the distributions it made during the year($4,000), all of the distributions are treated as distributions ofcurrent year earnings and profits. The corporation must issue a Form 1099-DIV to you by the endof January to report the $4,000 distributed to you during the previousyear as dividends. The corporation must use Form 1096 to report thisinformation to the IRS by February 28 (March 31 if filingelectronically). The corporation does not deduct these dividends onthe income tax return it files by March 15. Accumulated earnings and profits.If a corporation's earnings and profits for the year (figured as ofthe close of the year without reduction for any distributions madeduring the year) are less than the total amount of distributions madeduring the year, part or all of each distribution is treated as adistribution of accumulated earnings and profits. Accumulated earningsand profits are earnings and profits the corporation accumulated afterFebruary 1913 and before the current year. If the total amount of distributions is less than current yearearnings and profits, see Current year earnings and profits,earlier. Used with current year earnings and profits.If the corporation has current year earnings and profits, figurethe use of accumulated and current earnings and profits as follows. Divide the current year earnings and profits by the totalamount of distributions made during the year. Multiply each distribution by the percentage figured in (1)to get the amount treated as a distribution of current year earningsand profits. Start at the beginning of the year and treat the remainingpart of each distribution as a distribution of accumulated earningsand profits. If accumulated earnings and profits are reduced to zero, theremaining part of each distribution is applied against and reduces theadjusted basis of the stock in the hands of the shareholders. To theextent that the balance is more than the adjusted basis of the stock,it is treated as a gain from the sale or exchange of property. Example.You are the only shareholder of a corporation that uses thecalendar year as its tax year. In January, you use the worksheet inthe Form 5452 instructions to figure your corporation's current yearearnings and profits for the previous year. At the beginning of theyear, the corporation's accumulated earnings and profits balance was$20,000. During the year, the corporation made four $4,000distributions to you. At the end of the year (before subtractingdistributions made during the year), the corporation had $10,000 ofcurrent year earnings and profits. Since the corporation's current year earnings and profits ($10,000)were less than the amount of the distributions it made during the year($16,000), part of each distribution is treated as a distribution ofaccumulated earnings and profits. Treat the distributions as follows. Divide the current year earnings and profits ($10,000) bythe total amount of distributions made during the year ($16,000). Theresult is .625. Multiply each $4,000 distribution by the .625 figured in (1)to get the amount ($2,500) of each distribution that is treated as adistribution of current year earnings and profits. The remaining $1,500 of each distribution is treated as adistribution from accumulated earnings and profits. The corporationdistributed $6,000 ($1,500 4) of accumulated earnings andprofits. The remaining $14,000 ($20,000 - $6,000) of accumulatedearnings and profits is available for use in the following year. The corporation must issue a Form 1099-DIV to you by the endof January to report the $16,000 distributed to you during theprevious year as dividends. The corporation must use Form 1096 toreport this information to the IRS by February 28 (March 31 if filingelectronically). The corporation does not deduct these dividends onthe income tax return it files by March 15. Used without current year earnings and profits.If the corporation has no current year earnings and profits, figurethe use of accumulated earnings and profits as follows. If the current year earnings and profits balance isnegative, prorate the negative balance to the date of eachdistribution made during the year. Figure the available accumulated earnings and profitsbalance on the date of each distribution by subtracting the proratedamount of current year earnings and profits from the accumulatedbalance. Treat each distribution as a distribution of these adjustedaccumulated earnings and profits. If adjusted accumulated earnings and profits are reduced tozero, the remaining distributions are applied against and reduce theadjusted basis of the stock in the hands of the shareholders. To theextent that the balance is more than the adjusted basis of the stock,it is treated as a gain from the sale or exchange of property. Example.You are the only shareholder of a corporation that uses thecalendar year as its tax year. In January, you use the worksheet inthe Form 5452 instructions to figure your corporation's current yearearnings and profits for the previous year. At the beginning of theyear, the corporation's accumulated earnings and profits balance was$20,000. During the year, the corporation made four $4,000distributions to you on March 31, June 30, September 30, and December31. At the end of the year (before subtracting distributions madeduring the year), the corporation had a negative $10,000 earnings andprofits balance. Since the corporation had no earnings and profits for the year, allof the distributions are treated as distributions of accumulatedearnings and profits. Treat the distributions as follows. Prorate the negative current year earnings and profitsbalance to the date of each distribution made during the year. Thenegative $10,000 can be spread evenly by prorating negative $2,500 toeach distribution. The following table shows how to figure the availableaccumulated earnings and profits balance on the date of eachdistribution. hotel rooms NaplesMarch 31 Distribution Accumulated earnings and profits $20,000 Prorated current year earnings and profits ($2,500) Accumulated earnings and profits available $17,500 Amount of distribution treated as a dividend ($4,000) June 30 Distribution Accumulated earnings and profits $13,500 Prorated current year earnings and profits ($2,500) Accumulated earnings and profits available $11,000 Amount of distribution treated as a dividend ($4,000) September 30 Distribution Accumulated earnings and profits $7,000 Prorated current year earnings and profits ($2,500) Accumulated earnings and profits available $4,500 Amount of distribution treated as a dividend ($4,000) December 31 Distribution Accumulated earnings and profits $500 Amount of distribution treated as a dividend ($500) Nondividend amount (basis reduction in stockand/or gain from the sale or exchange of property) $3,500 Year-end accumulated earnings and profits $0 The corporation must issue a Form 1099-DIV to you by the endof January to report $12,500 of the $16,000 distributed to you duringthe previous year as dividends. The corporation must use Form 1096 toreport this information to the IRS by February 28 (March 31 if filingelectronically). The corporation does not deduct these dividends onthe income tax return it files by March 15. However, the corporationmust attach Form 5452 to this return to report the nondividenddistribution.