[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: 26CFR1.312-4]

[Page 48]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.312-4  Examples of adjustments provided in section 312(c).

    The adjustments provided in section 312(c) may be illustrated by the 
following examples:

    Example (1). On December 2, 1954, Corporation X distributed to its 
sole shareholder, A, an individual, as a dividend in kind a vacant lot 
which was not an inventory asset. On that date, the lot had a fair 
market value of $5,000 and was subject to a mortgage of $2,000. The 
adjusted basis of the lot was $3,100. The amount of the earnings and 
profits was $10,000. The amount of the dividend received by A is $3,000 
($5,000, the fair market value, less $2,000, the amount of the mortgage) 
and the reduction in the earnings and profits of Corporation X is $1,100 
($3,100, the basis, less $2,000, the amount of mortgage).
    Example (2). The facts are the same as in Example (1) above with the 
exception that the amount of the mortgage to which the property was 
subject was $4,000. The amount of the dividend received by A is $1,000, 
and there is no reduction in the earnings and profits of the corporation 
as a result of the distribution (disregarding such reduction as may 
result from an increase in tax to Corporation X because, of gain 
resulting from the distribution). There is a gain of $900 recognized to 
Corporation X, the difference between the basis of the property ($3,100) 
and the amount of the mortgage ($4,000), under section 311(c) and an 
increase in earnings and profits of $900.
    Example (3). Corporation A, having accumulated earnings and profits 
of $100,000, distributed in kind to its shareholders, not in 
liquidation, inventory assets which had a basis to it on the ``Lifo'' 
method (section 472) of $46,000 and on the basis of cost or market 
(section 471) of $50,000. The inventory had a fair market value of 
$55,000 and was subject to a liability of $35,000. This distribution 
results in a net decrease in earnings and profits of Corporation A of 
$11,000, (without regard to any tax on Corporation A) computed as 
follows:

``Fifo'' basis of inventory..........................   $50,000  .......
Less: ``Lifo'' basis of inventory....................    46,000  .......
                                                      ----------
Gain recognized--addition to earnings and profits (section        $4,000
 311(b)).......................................................
Adjustment to earnings and profits required by
 section 312(b)(1)(A):
  Fair market value of inventory.....................   $55,000  .......
  Less: ``Lifo'' basis plus adjustment under section     50,000    5,000
   311(b)............................................
                                                      -----------
 Total increase in earnings and profits........................    9,000
Decrease in earnings and profits--under section         $55,000  .......
 312(b)(1)(B)(i).....................................
Less: Liability assumed..............................    35,000  .......
                                                      ----------
Net amount of distribution (decrease in earnings)..............   20,000
                                                      -----------
 Net decrease in earnings and profits..........................   11,000