Federal Tax

Earnings and Profits (Portfolio 762)

  • Earnings and Profits discusses the principles and rules associated with earnings and profits (E&P) and analyzes the tax effects on E&P of corporate distributions.


Tax Portfolio, Earnings and Profits, No. 762, discusses the principles and rules associated with earnings and profits (E&P). Since the tax treatment of a distribution of property with respect to a corporation’s stock is directly related to a corporation’s E&P, the correct determination of a corporation’s E&P is critical. Therefore, the Portfolio also analyzes the tax effects on E&P of corporate distributions made with respect to or in exchange for stock, and the rules for carryover and allocation of E&P upon certain types of tax-free distributions and exchanges. Generally, every corporate distribution of property with respect to stock is conclusively presumed to have its source in E&P to the extent thereof, beginning with E&P of the current year, followed by E&P accumulated after February 28, 1913, and finally from E&P accumulated before March 1, 1913. Once E&P is depleted, distributions are presumed to be from sources other than E&P.

In the event of a tax-free transfer of property pursuant to a corporate reorganization or separation, all or part of the transferor’s E&P are also transferred to the acquiring corporation as part of the transaction. If boot is transferred upon such an otherwise tax-free transaction having the effect of the distribution of a dividend, each distributee is treated as having received a dividend in an amount not in excess of his pro rata share of the undistributed E&P of the corporation accumulated after February 28, 1913.

This Portfolio covers both separate and consolidated return aspects of E&P. It provides the practitioner with analysis of the proper accounting treatment of E&P, the treatment of specific items related to the E&P account, the effects of various types of corporate distributions on E&P, and how different types of transactions affect the E&P of the distributing corporation.

Table of Contents

I. Introduction
II. General Principles
III. Distributions of Property
IV. Distributions of Stock or Securities ()
V. Effect of Gain or Loss on E&P (ยง 312(f)(1))
VI. Effect of Receipt of Tax-Free Distributions on E&P
VII. Allocation in Certain Reorganizations
VIII. Distribution of Proceeds of Loan Insured by the U.S.
IX. Sale of Stock of Foreign Investment Company
X. Depreciation and Amortization
XI. Discharge of Indebtedness Income
XII. Interest Paid on Certain Registration-Required Obligations Not in Registered Form
XIII. Adjustments to E&P to More Accurately Reflect Economic Gain and Loss
XIV. Redemptions Using Related Corporations
XV. Special Rules for RICS and REITS
XVI. Corporate Distributions With Respect To Stock
XVII. E&P Carryover in Corporate Acquisitions: Transactions
XVIII. Earnings and Profits of Consolidated Group Members – In General
XIX. History of Consolidated Return E&P Rules
XX. Application of 1995 Regulations
XXI. Treatment of Particular Transactions
XXII. Predecessors and Successors
XXIII. Anti-Avoidance

David Friedel
Principal, Mergers And Acquisitions Group
PricewaterhouseCoopers LLP
William Galanis
William Galanis
PricewaterhouseCoopers LLP
Julie Allen
Partner - National Tax Services Mergers & Acquisitions
PricewaterhouseCoopers LLP