Roth & Company P.C. Summary of President's Dividend Proposal
UPDATE: The proposals outlined below were not in the 2003 tax law signed by the President 5/30/2003.  For information on the enacted proposals, click link below.
		INFORMATION ON 2003 TAX LAW AS ENACTED
Return to Tax Updates
Current Tax Law Rules				President's Proposals
C Corporations		S Corporations		C Corporations		S Corporations
1. Distributions are first taxable to extent of current and accumulated earnings and profits		1. Distributions are first non-taxable distribution from S corporation taxed earnings (AAA)		1. Distributions are first tax-free distributions of Excludable Earnings Amount (EDA) (1)		1. Distributions are first tax-free, to extentof Excludable Earnings Amount (EDA) to extent of E&P (whatever that means, exactly)
2. After earnings and profits are exhausted, distribuitons are a return of basis		2. Distributions after AAA is exhasted are taxable dividends to extent of C corporation earnings and profits		2. Once EDA is used up, distributions are non-taxable distributions from Cumulative Retained Earnings Basis Adjustments (CREBA), to extent of basis. (2)		2. Once EDA is used up, distributions are non-taxable distributions from Cumulative Retained Earnings Basis Adjustments (CREBA), to extent of basis.
3. Once basis is exhausted, distributions are capital gain.		3. After earnings and profits are exhausted, distribuitons are a return of basis		3. If there is no remaining EDA or CREBA, distributions are taxable dividends to extent of accumulated Earnings and profits		3. Distributions are first non-taxable distribution from S corporation taxed earnings (AAA)
		4. Once basis is exhausted, distributions are capital gain.		4. After earnings and profits are exhausted, distribuitons are a return of basis		4. Distributions after AAA is exhasted are taxable dividends to extent of C corporation earnings and profits
				5. Once basis is exhausted, distributions are capital gain.		5. After earnings and profits are exhausted, distribuitons are a return of basis
						6. Once basis is exhausted, distributions are capital gain.
(1) EDA = U.S. Income Taxes before foreign tax credit ÷ .35 - U.S. Income Taxes + Excludible dividends received + REBAs from stock owned.
This computation uses income taxes from the prior year return.  For example, a calendar-year corporation would compute its 2006 EDA using the 12/31/2005 form 1120 (net of deficiencies assessed and refunds paid with respect to prior years before 2001)
(2). Retained Earnings Basis Adjustment (REBA) = EDA – distributions; CREBA = "Cumulative Retained Earnings Basis Adjustments."  The shareholders would increase their stock basis for determining gain or loss on sale by their share of REBA.
Current Law Treatment of Undistributed Income
C Corporations		S Corporations
Increases corporate earnings and profits		Increases AAA available for tax-free distributions
No increase in basis of stock		Increases stock (or debt) basis
Current Law Treatment of Corporations Receiving Dividends
C Corporations		S Corporations
Consolidated returns: elimination		Elimination for certain wholly-owned subsidiaries.
80% non-consolidated: 100% deduction		Full pass-through otherwise
20-80% owner: 80% deduction
<20% owner: 70% deduction, ACE add-back
Sum of EDA and REBA cannot exceed lesser of EDA or current and accumulated earnings and profits.
Basis increases do not go to preferred stock that is limited to dividends.  They are allocated in the same manner dividends would be, and reported on 1099s.  “Regulations may address other situations where a corporation has multiple classes of stock.”
E&P and EDA are reduced by REBA.
Corporate 70 and 80% DRD will be eliminated for post-2001 earnings, and entirely after 2005.
EXAMPLES
Example 1: Corporation has taxable income of $50,000.  It ignores state taxes.  It pays federal taxes of $7,500 (15%).  It pays no dividends. Its EDA is $13,928.57: $7,500 ÷ .35 - $7,500.  It will issue its shareholders a 1099 telling them that they can increase their basis by the REBA of $13,928.57 (lesser of EDA or E&P of $42,500).
Example 2: Corporation has regular taxable income of 200,000 and AMT taxable income of $1,000,000.  It pays $200,000 of tax: $68,000 regular tax and $132,000 AMT.  Corporation has accumulated E&P of $2,000,000.
Its EDA is $571,428.57: $200,000 ÷ .35 - $200,000.
Example 3: Marvin  buys a share of Bush Oil common stock for $10,000.  30 days later, the company declares and pays a $500 dividend.  Because he purchased the stock less than 45 days before it went ex-dividend, the dividend is taxable.
Example 4:  Marvin  buys a share of Bush Oil common stock for $10,000.  100 days later, the company declares and pays a $2,000 excludible dividend.  Because the dividend is “extraordinary,” he must reduce his basis by $2,000.
Example 5:  Gary buys a share of Animated Engineering common stock in January 2004 for $1, representing 50% of the shares outstanding.  The company has CREBA of $10,000, but no current EDA.  The company earns pays tax of $10 in 2004 and $10 in 2005.  In January 2006, the company distributes $100 to Gary.  His distribution is as follows:
·       Excludible dividend: $9.29 (2005 tax of $10 ÷ .35 -$10 x 50% ownership)
·       Tax-free CREBA of $10.29 (2004 undistributed EDA + $1 initial basis)
·       Capital-gain CREBA distribution of 80-42 remainder.
Gary’s stockbroker, who bought the other share in 2001 for $5,000 (from Gary) will have a $9.29 tax-free distribution and a $90.71 tax-free return of CREBA.
Return to Tax Updates				See Official Explanation