Tax Section 311 Taxability of a Corporation on Dividends

986 Words Mar 1st, 2006 4 Pages
A corporation that distributes property that has appreciated in value must recognize a gain at the time of distribution. The corporation is treated as if it had sold the property. The gain equals the property's fair market value less its adjusted basis. Code Sec. (b). However, the corporation does not recognize a loss if the property had declined in value. Also, the corporation recognizes no gain or loss if t distributes its own stock rights to its shareholders. Code Sec. (a). The character of the recognized gain depends on the property distributed; thus it may be ordinary income, capital gain, or Section 1231 gain.
An example illustrating this section was the Tax Court, deciding in favor of the IRS, held in Pope & Talbot, Inc., v. Com,
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The Tax Court, per Judge Ruwe, issued an order on May 8, 1995, denying Pope & Talbot's motion and granting the IRS's motion. The court's opinion characterized the issue before it as one of "first impression," and found resort to the legislative history of the statute necessary since the court was unable to "achieve...certainty based on the language of the statute." After reviewing the legislative history of IRC Sec. 311, the court observed the following: It is apparent that the purpose underlying IRC Sec. 311(d) was to tax the appreciation in value that occurred while the corporation held the property and to prevent a corporation from avoiding tax on the inherent gain by distributing such property to its shareholders...It follows that we must focus on the value of the Washington properties as owned by petitioner and value them as if petitioner had sold them at fair market value at the time of distribution.
The court also remarked that "theoretically" the partnership could have sold the property at fair market value and then distributed the proceeds. If this had been done, the court continued, the shareholders would then have been able to realize a "proportionate share" of the full FMV of the property distributed.
The court found unpersuasive Pope & Talbot's argument that the plain meaning of IRC Sec. 311(d) mandated that distributions of property to shareholders be valued by reference to the property

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