Part 1: Distribution under Section 301 for Mark Z.
Relevant Facts:
On January 1, 2020, Mark Z. owned all of the stock of Mita Corporation, with an adjusted basis
of $2,000. During the 2020 tax year, Mark Z. received a distribution from Mita Corporation
totaling $30,000. This distribution was comprised of $10,000 in cash and $20,000 in listed
securities, which were distributed by Mita Corporation. The corporation operates on a calendar
year basis, and as of December 31, 2020, it had accumulated earnings and profits (E&P) of
$26,000. There were no earnings or profits for the current tax year (2020), and no deficits. The
central issue here is how the distribution will be treated under Section 301 of the Internal
Revenue Code (IRC), given the existence of accumulated E&P.
Specific Issues:
1. To what extent is the $30,000 distribution treated as a dividend under Section 301?
2. How should the portion of the distribution that exceeds accumulated earnings and profits
be treated?
Conclusion:
Under Section 301, the distribution to Mark Z. will be classified partly as a dividend and partly
as a return of capital. Given Mita Corporation's accumulated E&P of $26,000, $26,000 of the
$30,000 distribution will be treated as a dividend and included in Mark Z.'s gross income. The
remaining $4,000 will reduce Mark Z.’s basis in the stock. Since the basis of his stock is $2,000,
reducing the basis by $4,000 results in a $2,000 capital gain.
Support:
1. IRC Section 301(c)(1)-(3) establishes the treatment of distributions from corporations.
Distributions are first applied as dividends to the extent of E&P, with the remainder
reducing the stockholder's basis, and any excess being treated as capital gain.
2. Treasury Regulation §1.301-1 clarifies the application of Section 301, specifying how
amounts exceeding E&P are treated.
3. Boulware v. United States, 552 U.S. 421 (2008)—This case confirms the treatment of
distributions as dividends to the extent of E&P, with the excess amounts allocated
according to the rules on return of capital and capital gain.
Part 2: Distribution to Banana Corporation
Relevant Facts:
Banana Corporation owned all the stock of Mita Corporation. During 2020, Mita Corporation
made a distribution of $25,000 to Banana Corporation. This distribution consisted of $10,000 in
cash and $15,000 in listed securities. The securities distributed had an adjusted basis of $15,000
in Mita Corporation. Mita Corporation had accumulated earnings and profits (E&P) of $26,000
as of December 31, 2020, but had no current E&P or deficits for that year. The issue to resolve is
how the distribution to Banana Corporation will be treated under Section 301, given Mita
Corporation's accumulated E&P and the adjusted basis of the distributed securities.
Specific Issues:
1. How is the distribution of $25,000 to Banana Corporation treated under Section 301?
2. What is the impact of the adjusted basis of the securities on the treatment of the
distribution for Banana Corporation?
Conclusion:
The distribution of $25,000 to Banana Corporation will be classified as a dividend to the extent
of Mita Corporation's accumulated earnings and profits (E&P), which is $26,000. Since the total
distribution is $25,000 and Mita Corporation has $26,000 in accumulated E&P, the entire
distribution will be treated as a dividend for tax purposes. The adjusted basis of the securities
does not impact the treatment of the distribution as a dividend under Section 301.
Support:
1. IRC Section 301 governs the treatment of distributions from corporations. The rule
applies to both individual and corporate shareholders, treating distributions as dividends
to the extent of E&P.
2. Treasury Regulation §1.301-1 provides further clarification on how Section 301 applies
to corporate shareholders.
3. United States v. Maclin, 493 F.2d 680 (9th Cir. 1974)—This case addresses the
treatment of corporate distributions under Section 301, confirming that distributions are
taxed as dividends to the extent of available E&P.
Part 3: Stock Attribution Rules
Relevant Facts:
An individual, H, owns 25 shares of stock in a corporation. His wife (W), son (S), and grandson
(G) each also own 25 shares, resulting in the family collectively holding 100 shares. Under
Section 318(a) of the IRC, stock ownership is attributed among family members, such that each
member may be treated as owning the shares held by the other family members for tax purposes.
The goal is to determine how much stock each person is deemed to own after applying these
stock attribution rules.
Specific Issues:
1. How does Section 318(a) attribute stock ownership among H, W, S, and G?
2. How do the stock attribution rules affect each individual’s ownership interest in the
corporation for tax purposes?
Conclusion:
Under the stock attribution rules of Section 318(a), each individual will be treated as owning all
100 shares of stock in the corporation. Section 318(a) attributes stock held by a spouse, children,
grandchildren, and parents to the taxpayer. As a result, H, W, S, and G will each be deemed to
own the 25 shares held by the other family members, effectively giving each individual a 100%
ownership interest in the corporation for tax purposes.
Support:
1. IRC Section 318(a)(1) outlines the rules for family stock attribution, stating that stock
owned by a spouse, children, grandchildren, or parents is attributed to the taxpayer.
2. Treasury Regulation §1.318-1 clarifies how stock attribution rules are applied to family
members for tax purposes.
3. Helvering v. Clifford, 309 U.S. 331 (1940)—This case provides a foundational
interpretation of stock attribution, emphasizing the expansion of ownership through
familial relationships for tax purposes.
