26 U.S.C. § 312: Effect on earnings and profits

the amount of money, the principal amount of the obligations of such corporation (or, in the case of obligations having original issue discount, the aggregate issue price of such obligations), and the adjusted basis of the other property, so distributed. the earnings and profits of the corporation shall be increased by the amount of such excess, and subsection (a)(3) shall be applied by substituting “fair market value” for “adjusted basis”. the amount of any liability to which the property distributed is subject, and the amount of any liability of the corporation assumed by a shareholder in connection with the distribution. if no gain to such distributee from the receipt of such stock or securities, or property, was recognized under this title, or if the distribution was not subject to tax in the hands of such distributee by reason of section 305(a). For purposes of this subsection, the term “stock or securities” includes rights to acquire stock or securities. for the purpose of the computation of the earnings and profits of the corporation, shall (except as provided in subparagraph (B)) be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain, except that no regard shall be had to the value of the property as of March 1, 1913 ; but for purposes of the computation of the earnings and profits of the corporation for any period beginning after February 28, 1913 , shall be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain. no such increase shall be made in respect of the part of such distribution which (under such law) is directly applied in reduction of the basis of the stock in respect of which the distribution was made; and no such increase shall be made if (under such law) the distribution causes the basis of the stock in respect of which the distribution was made to be allocated between such stock and the property received (or such basis would, but for section 307(b), be so allocated). If any increase or decrease in the earnings and profits for any period beginning after February 28, 1913 , with respect to any matter would be different had the adjusted basis of the property involved been determined without regard to its March 1, 1913 , value, then, except as provided in paragraph (2), an increase (properly reflecting such difference) shall be made in that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913 . If the application of subsection (f) 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 subsection (f) and in lieu of the rule provided in paragraph (1) of this subsection, 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 value of the property on March 1, 1913 , and if such amount so applied in reduction of the decrease 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 March 1, 1913 . In the case of a distribution or exchange to which section 355 (or so much of section 356 as relates to section 355) applies, proper allocation with respect to the earnings and profits of the distributing corporation and the controlled corporation (or corporations) shall be made under regulations prescribed by the Secretary. In the case of a reorganization described in subparagraph (C) or (D) of section 368(a)(1), proper allocation with respect to the earnings and profits of the acquired corporation shall, under regulations prescribed by the Secretary, be made between the acquiring corporation and the acquired corporation (or any corporation which had control of the acquired corporation before the reorganization). there is outstanding a loan to such corporation which was made, guaranteed, or insured by the United States (or by any agency or instrumentality thereof), and the amount of such loan so outstanding exceeds the adjusted basis of the property constituting security for such loan, For purposes of computing the earnings and profits of a corporation for any taxable year beginning after June 30, 1972 , the allowance for depreciation (and amortization, if any) shall be deemed to be the amount which would be allowable for such year if the straight line method of depreciation had been used for each taxable year beginning after June 30, 1972 . If for any taxable year a method of depreciation was used by the taxpayer which the Secretary has determined results in a reasonable allowance under section 167(a) and which is the unit-of-production method or other method not expressed in a term of years, then the adjustment to earnings and profits for depreciation for such year shall be determined under the method so used (in lieu of the straight line method). Except as provided in subparagraph (B), in the case of tangible property to which section 168 applies, the adjustment to earnings and profits for depreciation for any taxable year shall be determined under the alternative depreciation system (within the meaning of section 168(g)(2)). For purposes of computing the earnings and profits of a corporation, except as provided in clause (ii), any amount deductible under section 179, 179B, 179C, 179D, or 179E shall be allowed as a deduction ratably over the period of 5 taxable years (beginning with the taxable year for which such amount is deductible under section 179, 179B, 179C, 179D, or 179E, as the case may be). In the case of a corporation that is a real estate investment trust, any amount deductible under section 179D shall be allowed in the year in which the property giving rise to such deduction is placed in service (or, in the case of energy efficient building retrofit property, the year in which the qualifying final certification is made). The provisions of paragraph (1) shall not apply in computing the earnings and profits of a foreign corporation for any taxable year for which less than 20 percent of the gross income from all sources of such corporation is derived from sources within the United States. In computing the earnings and profits of a corporation for any taxable year, the allowance for depreciation (and amortization, if any) shall be computed without regard to any basis adjustment under section 50(c). The earnings and profits of a corporation shall not include income from the discharge of indebtedness to the extent of the amount applied to reduce basis under section 1017. the interest of any shareholder of a corporation is terminated or extinguished in a title 11 or similar case (within the meaning of section 368(a)(3)(A)), and there is a deficit in the earnings and profits of the corporation, The earnings and profits of any corporation shall not be decreased by any interest with respect to which a deduction is not or would not be allowable by reason of section 163(f), unless at the time of issuance the issuer is a foreign corporation that is not a controlled foreign corporation (within the meaning of section 957) and the issuance did not have as a purpose the avoidance of section 163(f) of this subsection 1 1 Subsec. (m) was enacted without a period at the end. no deduction shall be allowed with respect to such amount, and the basis of the property with respect to which such charges are allocable shall be increased by such amount. interest paid or accrued on indebtedness incurred or continued to acquire, construct, or carry property, property taxes, and similar carrying charges, The term “construction period” has the meaning given the term production period under section 263A(f)(4)(B). 2 2 See References in Text note below. shall be capitalized, and shall be allowed as a deduction ratably over the 60-month period beginning with the month in which such amount was paid or incurred. shall be capitalized, and the month in which production from the deposit begins, or the month in which such amount was paid or incurred. Sections 173 and 248 shall not apply. Earnings and profits shall be increased or decreased by the amount of any increase or decrease in the LIFO recapture amount as of the close of each taxable year; except that any decrease below the LIFO recapture amount as of the close of the taxable year preceding the 1st taxable year to which this paragraph applies to the taxpayer shall be taken into account only to the extent provided in regulations prescribed by the Secretary. the inventory amount of the inventory assets under the first-in, first-out method authorized by section 471, exceeds the inventory amount of such assets under the LIFO method. The term “LIFO method” means the method authorized by section 472 (relating to last-in, first-out inventories). The term “inventory assets” means stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year. if the corporation uses the retail method of valuing inventories under section 472, by using such method, or if subclause (I) does not apply, by using cost or market, whichever is lower. In the case of any installment sale, earnings and profits shall be computed as if the corporation did not use the installment method. In the case of a taxpayer who uses the completed contract method of accounting, earnings and profits shall be computed as if such taxpayer used the percentage of completion method of accounting. If a corporation distributes amounts in a redemption to which section 302(a) or 303 applies, the part of such distribution which is properly chargeable to earnings and profits shall be an amount which is not in excess of the ratable share of the earnings and profits of such corporation accumulated after February 28, 1913 , attributable to the stock so redeemed. paragraphs (4) and (6) shall apply only in the case of taxable years beginning after December 31, 1985 , and paragraph (5) shall apply only in the case of taxable years beginning after December 31, 1987 . For purposes of subsection (a)(2), the terms “original issue discount” and “issue price” have the same respective meanings as when used in subpart A of part V of subchapter P of this chapter. The provisions of paragraphs (1), (2), and (3) of section 312(n) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as added by subsection (a)) shall apply to amounts paid or incurred in taxable years beginning after September 30, 1984 . The provisions of paragraph (4) of section 312(n) of such Code (as so added) shall apply to distributions after September 30, 1984 ; except that such provisions shall not apply to any distribution to which the amendments made by section 54(a) of this Act [amending section 311 of this title ] do not apply. The provisions of paragraph (5) of section 312(n) of such Code (as so added) shall apply to taxable years beginning after September 30, 1984 . The provisions of paragraph (6) of section 312(n) of such Code (as so added) shall apply to sales after September 30, 1984 , in taxable years ending after such date. The provisions of paragraph (7) of section 312(n) of such Code (as so added) shall apply to contracts entered into after September 30, 1984 , in taxable years ending after such date. The amendments made by subsection (b) [amending this section] shall apply to property placed in service in taxable years beginning after September 30, 1984 . The amendments made by subsection (c) [amending this section and section 1275 of this title ] shall apply with respect to distributions declared after March 15, 1984 , in taxable years ending after such date.”