[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: 26CFR1.312-9]

[Page 53-54]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.312-9  Adjustments to earnings and profits reflecting increase 
in value accrued before March 1, 1913.

    (a) In order to determine, for the purpose of ascertaining the 
source of dividend distributions, that part of the earnings and profits 
which is represented by increase in value of property accrued before, 
but realized on or after, March 1, 1913, section 312(g) prescribes 
certain rules.
    (b)(1) Section 312(g)(1) sets forth the general rule with respect to 
computing the increase to be made in that part of the earnings and 
profits consisting of increase in value of property accrued before, but 
realized on or after, March 1, 1913.
    (2) The effect of section 312(g)(1) may be illustrated by the 
following examples:

    Example (1). Corporation X acquired nondepreciable property before 
March 1, 1913, at a cost of $10,000. Its fair market value as of March 
1, 1913, was $12,000 and it was sold in 1955 for $15,000. The increase 
in earnings and profits based on the value as of March 1, 1913, 
representing earnings and profits accumulated since February 28, 1913, 
is $3,000. If the basis is determined without regard to the value as of 
March 1, 1913, there would be an increase in earnings and profits of 
$5,000. The difference of $2,000 ($5,000 minus $3,000) represents the 
increase to be made in that part of the earnings and profits of 
Corporation X consisting of the increase in value of property accrued 
before, but realized on or after, March 1, 1913.
    Example (2). Corporation Y acquired depreciable property in 1908 at 
a cost of $100,000. Assuming no additions or betterments, and that the 
depreciation sustained before March 1, 1913, was $10,000, the adjusted 
cost as of that date was $90,000. Its fair market value as of March 1, 
1913, was $94,000 and on February 28, 1955, it was sold for $25,000. For 
the purpose of determining gain from the sale, the basis of the property 
is the fair market value of $94,000 as of March 1, 1913, adjusted for 
depreciation for the period subsequent to February 28, 1913, computed on 
such fair market value. If the amount of the depreciation deduction 
allowed after February 28, 1913, and properly allowable for each of such 
years to the date of the sale in 1955 is the aggregate sum of $81,467, 
the adjusted basis for determining gain in 1955 ($94,000 less $81,467) 
is $12,533 and the gain would be $12,467 ($25,000 less $12,533). The 
increase in earnings and profits accumulated since February 28, 1913, by 
reason of the sale, based on the value as of March 1, 1913, adjusted for 
depreciation is $12,467. If the depreciation since February 28, 1913, 
had been based on the adjusted cost of $90,000 ($100,000 less $10,000) 
instead of the March 1, 1913, value of $94,000, the depreciation 
sustained from that date to the date of sale would have been $78,000 
instead of $81,467 and the actual gain on the sale based on the cost of 
$100,000 adjusted by depreciation on such cost to $12,000 ($100,000 
reduced by the sum of $10,000 and $78,000) would be $13,000 ($25,000 
less $12,000). If the adjusted basis of the property was determined 
without regard to the value as of March 1, 1913, there would be an 
increase in earnings and profits of $13,000. The difference of $533 
($13,000 minus $12,467) represents the increase to be made in that part 
of the earnings and profits of Corporation Y consisting of the increase 
in value of property accrued before, but realized on or after, March 1, 
1913 (assuming that the proper increase in such surplus had been made 
each year for the difference between depreciation based on cost and the 
depreciation based on March 1, 1913, value). Thus, the total increase in 
that part of earnings and profits consisting of the increase in value of 
property accrued before, but realized on or after, March 1, 1913, is 
$4,000 ($94,000 less $90,000).


[[Page 54]]


    (c)(1) Section 312(g)(2) is an exception to the general rule in 
section 312(g)(1) and also operates as a limitation on the application 
of section 312(f). It provides that, if the application of section 
312(f)(1)(B) to a sale or other disposition after February 28, 1913, 
results in a loss which is to be applied in decrease of earnings and 
profits for any period beginning after February 28, 1913, then, 
notwithstanding section 312(f) and in lieu of the rule provided in 
section 312(g)(1), the amount of such loss so to be applied shall be 
reduced by the amount, if any, by which the adjusted basis of the 
property used in determining the loss, exceeds the adjusted basis 
computed without regard to the fair market value of the property on 
March 1, 1913. If the amount so applied in reduction of the loss exceeds 
such loss, the excess over such loss shall increase that part of the 
earnings and profits consisting of increase in value of property accrued 
before, but realized on or after March 1, 1913.
    (2) The application of section 312(g)(2) may be illustrated by the 
following examples:

    Example (1). Corporation Y acquired nondepreciable property before 
March 1, 1913, at a cost of $8,000. Its fair market value as of March 1, 
1913, was $13,000, and it was sold in 1955 for $10,000. Under section 
312(f)(1)(B) the adjusted basis would be $13,000 and there would be a 
loss of $3,000. The application of section 312(f)(1)(B) would result in 
a loss from the sale in 1955 to be applied in decrease of earnings and 
profits for that year. Section 312(g)(2), however, applies and the loss 
of $3,000 is reduced by the amount by which the adjusted basis of 
$13,000 exceeds the cost of $8,000 (the adjusted basis computed without 
regard to the value on March 1, 1913), namely $5,000. The amount of the 
loss is, accordingly, reduced from $3,000 to zero and there is no 
decrease in earnings and profits of Corporation Y for the year 1955 as a 
result of the sale. The amount applied in reduction of the decrease, 
namely, $5,000, exceeds $3,000. Accordingly, as a result of the sale the 
excess of $2,000 increases that part of the earnings and profits of 
Corporation Y consisting of increase in value of property accrued 
before, but realized on or after March 1, 1913.
    Example (2). Corporation Z acquired nondepreciable property before 
March 1, 1913, at a cost of $10,000. Its fair market value as of March 
1, 1913, was $12,000, and it was sold in 1955 for $8,000. Under section 
312(f)(1)(B) the adjusted basis would be $12,000 and there would be a 
loss of $4,000. The application of section 312(f)(1)(B) would result in 
a loss from the sale in 1955 to be applied in decrease of earnings and 
profits for that year. Section 312(g)(2), however, applies and the loss 
of $4,000 is reduced by the amount by which the adjusted basis of 
$12,000 exceeds the cost of $10,000 (the adjusted basis computed without 
regard to the value on March 1, 1913), namely, $2,000. The amount of the 
loss is, accordingly, reduced from $4,000 to $2,000 and the decrease in 
earnings and profits of Corporation Z for the year 1955 as a result of 
the sale is $2,000 instead of $4,000. The amount applied in reduction of 
the decrease, namely, $2,000, does not exceed $4,000. Accordingly, as a 
result of the sale there is no increase in that part of the earnings and 
profits of Corporation Z consisting of increase in value of property 
accrued before, but realized on or after, March 1, 1913.