Tax Section 311 Taxability of a Corporation on Dividends

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A corporation that distributes property that has appreciated in value must recognize a gain at the time of distribution. The corporation is treated as if it had sold the property. The gain equals the property's fair market value less its adjusted basis. Code Sec. (b). However, the corporation does not recognize a loss if the property had declined in value. Also, the corporation recognizes no gain or loss if t distributes its own stock rights to its shareholders. Code Sec. (a). The character of the recognized gain depends on the property distributed; thus it may be ordinary income, capital gain, or Section 1231 gain. An example illustrating this section was the Tax Court, deciding in favor of the IRS, held in Pope & Talbot, Inc., v. Com, 104 TC __, No. 29, that a corporation which distributed discrete partnership units of property composed of timber and resort interests in the Northwest, must recognize distribution gain under IRC Sec. 311(d) as if it had instead sold the entire interest to a single purchaser. The taxpayer had argued that the fair market value of the distributed property for purposes of determining Internal Revenue Code Sec. 311 gain must be equal to the sum of the distributed partnership interests, which were publicly traded on the date of distribution. The facts surrounding the case are as followed. The commissioner proposed an $18.7 million deficiency determination against Pope & Talbot for the 1985 and 1986 taxable years, alleging that Pope &Talbot had incorrectly calculated the corporation's gain under IRC Sec.31(d). [IRC Sec. 311(d) was amended in 1986 and is now IRC Sec. 311(b).] Pope & Talbot had, in 1985, contributed its timber, land development, and resort business to a newly formed Delaware limited partnership. Immediately thereafter, the partnership interests were distributed pro rata to Pope &Talbots's shareholders. The transaction was similar to a IRC Sec. 355 spin-off, except that the equity interests were those of a newly created...
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