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rather payments with respect to petitioner's stock. (See infra
pp. 27-30 for a discussion of petitioner's basis in GAPS and JJM
by virtue of these contributions.)
(c) Tax Treatment of Corporate Distributions
Section 301 provides a three-tiered sequence for determining
the tax treatment of corporate distributions. Sec. 301(c).
First, the distributions are dividends, as determined under
section 316, to the extent of the corporation’s earnings and
profits. Sec. 301(c)(1). Second, further distributions are
nontaxable returns of capital to the extent of the shareholder’s
basis in the stock of the corporation. Sec. 301(c)(2). Third,
further distributions are capital gain to the extent they exceed
the shareholder’s basis in his stock. Sec. 301(c)(3).
Corporate distributions are dividends to the extent of
corporate earnings and profits. Sec. 316. The parties
stipulated to using current earnings and profits only.
Respondent contends that GAPS's and JJM's 1989 current earnings
and profits were $65,367 and $22,257, respectively. Petitioners
contend that GAPS's 1989 earnings and profits were between
$51,174 and $65,376, and that JJM's 1989 earnings and profits
were between $17,664 and $23,365.
Petitioners did not explain the factors that created the
ranges of earnings and profits argued in their briefs. They did,
however, argue that certain items, such as accrued taxes,
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