When a corporation distributes appreciated property to a shareholder, the corporation must recognize gain as if it sold the property for its fair market value. § 311(b). This reversed the old General Utilities doctrine, which allowed tax‑free distributions of appreciated property. General Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935).
How does this affect the corporation’s E&P? Under § 312(b), the corporation first increases its E&P by the amount of built‑in gain recognized, then reduces its E&P by the fair market value of the property distributed. The net effect is a reduction in E&P by the property’s adjusted basis.
Example from the casebook: Corporation Q has accumulated E&P of 25,000 and current E&P of 0. It distributes stock of Corporation R (basis 31,000) to shareholder S. Corporation Q recognizes
6,000 of current E&P. So Q’s total E&P before the distribution is
25,000 + 6,000). After the distribution, its E&P is 0 – it reduces E&P by the $31,000 fair market value of the property distributed.
What about loss property? Under § 311(a), the corporation cannot recognize loss on a distribution of property to a shareholder. And under § 312(a)(3), the corporation reduces its E&P by the property’s basis (not its value). So the corporation can effectively “recognize” a loss for E&P purposes, even though it can’t deduct it for income tax purposes.
If you’re planning to distribute appreciated property to shareholders, be prepared for corporate‑level gain. And if you’re distributing loss property, consider selling it to a third party instead – the loss will be deductible, whereas distributing it gives no deduction.
This article is for general informational purposes only and is subject to change. Tax laws are complex and vary by situation. You should consult a qualified professional for advice specific to your circumstances. For questions, contact Alan Goldstein.
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