[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.312-1]

[Page 47]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.312-1  Adjustment to earnings and profits reflecting distributions 
by corporations.

    (a) In general, on the distribution of property by a corporation 
with respect to its stock, its earnings, and profits (to the extent 
thereof) shall be decreased by--
    (1) The amount of money,
    (2) The principal amount of the obligations of such corporation 
issued in such distribution, and
    (3) The adjusted basis of other property.

For special rule with respect to distributions to which section 312(e) 
applies, see Sec. 1.312-5.
    (b) The adjustment provided in section 312(a)(3) and paragraph 
(a)(3) of this section with respect to a distribution of property (other 
than money or its own obligations) shall be made notwithstanding the 
fact that such property has appreciated or depreciated in value since 
acquisition.
    (c) The application of paragraphs (a) and (b) of this section may be 
illustrated by the following examples:

    Example (1). Corporation A distributes to its sole shareholder 
property with a value of $10,000 and a basis of $5,000. It has $12,500 
in earnings and profits. The reduction in earnings and profits by reason 
of such distribution is $5,000. Such is the reduction even though the 
amount of $10,000 is includible in the income of the shareholder (other 
than a corporation) as a dividend.
    Example (2). The facts are the same as in Example (1) above except 
that the property has a basis of $15,000 and the earnings and profits of 
the corporation are $20,000. The reduction in earnings and profits is 
$15,000. Such is the reduction even though only the amount of $10,000 is 
includible in the income of the shareholder as a dividend.

    (d) In the case of a distribution of stock or rights to acquire 
stock a portion of which is includible in income by reason of section 
305(b), the earnings and profits shall be reduced by the fair market 
value of such portion. No reduction shall be made if a distribution of 
stock or rights to acquire stock is not includible in income under the 
provisions of section 305.
    (e) No adjustment shall be made in the amount of the earnings and 
profits of the issuing corporation upon a disposition of section 306 
stock unless such disposition is a redemption.