MODULE 36 TAXES: CORPORATE 573

1. Parent-subsidiary-Basically same as P-S group eligible to file consolidated return, except own-
ership requirement is 80% of combined voting power or total value of stock. Affiliated corpora-
tions are subject to the controlled group limitations if the corporations file separate tax returns.
2. Brother-sister-Two or more corporations ifS'or fewer persons who are individuals, estates, or
trusts own stock possessing more than SO% of the total combined voting power, or more than SO%
of the total.combined voting power, or more than SO% of the total value of all shares of stock of
each corporation, taking into account the stock ownership of each person only to the extent such
stock ownership is identical with respect to each corporation.
EXAMPLE: Individual Corporations Stock considered
shareholder ~ _X_ for 50% test
A 30% 20% 20%
B 5 40 5%
C 30 35 30%
D 15 5 5%
E ..1Q -- --
liW% liW% 60%
Corporations Wand X are a controlled group since five or fewer individuals o~n more than 50% of each
corporation when counting only identical ownership.
EXAMPLE: Individual Corporations Stock considered
shareholder _Y_ _2_ for 50% test
F 80% 5% 5%
G 10 90 10
H -.lQ....2 ....2
lJ}Q% lJ}Q% 20%
Y and 2 are not a controlled group since shareholders F, G, and 11 do not own more than 50% of Y and 2 when
counting only identical stock ownership.
c. Combined-The parent in a P-S group is also a member of a brother-sister group of corporations.
EXAMPLE: Individual H owns 100% of the stock of Corporations P and Q. Corporation P owns 100% of the
stock of Corporation S. P, S, and Q are members of one controlled group.
3. Dividends and Distributions
4. Ordinary corporate distributions
5. Corporate distributions of property to shareholders on their stock are subject to a three-step treat-
ment.
(1) Dividend-to be included in gross income
(2) Return of stock basis-nontaxable and reduces shareholder's basis for stock
(3) Gain-to extent distribution exceeds shareholder's stock basis
6. The amount of distribution to a shareholder is the cash plus the FMV of other property received,
reduced by liabilities assumed.
7. A shareholder's tax basis for distributed property is the property's FMV at date of distribution
(not reduced by liabilities).
8. A dividend is a distributio~ of property by a corporation to its shareholders out of
(1) Earnings and profits of the current taxable year (CEP), computed at the end of the year, with-
out regard to the amount of earnings and profits at the date of distribution; or,
(2) Earnings and profits accumulated after February 28, 1913 (AEP).
EXAMPLE;' Corporation X has earnings and profits of $6,000 and makes a $10,000 distribution to its sole
shareholder, A, who has a stock basis of $3,000. The $10,000 distribution to A will be treated as a dividend of
$6,000, a nontaxable return of stock basis of $3,000, and a capital gain of $1,000.
(a) CEP are first allocated to distributions on preferred stock, then to common stock.
(b) CEP are allocated pro rata to multiple distributions on the same class of stock if
distributions exceed CEP.
(c) AEP are allocated to distributions in the order in which the distributions are made.
EXAMPLE: A corporation has both preferred and common stock outstanding and no accumulated
earnings and profits. For the current year, it has current earnings and profits of $15,000, and during the
year distributes cash of $10,000 to its preferred shareholders, and $10,000 to its common shareholders.
The $15,000 of CEP are first allocated to the distribution to the preferred shareholders, making all