Academic journal article Journal of Accountancy

Calculating Gain on Corporate Distributions

Academic journal article Journal of Accountancy

Calculating Gain on Corporate Distributions

Article excerpt

In 1986, Congress repealed the last element of the General Utilities doctrine. As a result, corporations must recognize gain when they distribute appreciated assets to stockholders, regardless of whether they structure the transaction as a property dividend or as a stock redemption. Recently, the Ninth Circuit Court of Appeals addressed how to calculate the gain on distribution.

Pope & Talbot, a publicly held corporation, owned properties in the state of Washington. The company believed the market price of its shares did not properly reflect the value of these properties so it transferred them to a limited partnership and distributed the partnership interests to company shareholders. Between the time the properties were transferred to the limited partnership and the interests distributed to shareholders, the partnership interests began to trade on the Pacific Stock Exchange on a "when-issued" basis.

To calculate the gain on the distribution, Pope & Talbot subtracted the basis of the partnership interests (the carry-over basis from the properties transferred to the partnership) from their aggregate value, based on the average price on the exchange. The IRS recalculated the gain based on the higher fair market value of the properties the company transferred to the partnership.

Result. For the IRS, with one dissenting opinion. Pope & Talbot argued that the purpose of the code's gain recognition requirement is to equate a predistribution sale by the company with a postdistribution sale by the shareholders. However, the Ninth Circuit rejected this argument on the grounds that the wording of IRC section 311 is clear and unambiguous. …

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