Rev. Proc. 65-10

SECTION 1. PURPOSE.

.01 The purpose of this Revenue Procedure is to outline instructions and guidelines relating to corporate distributions and the determination of earnings and profits in order to provide stockholders more certainty as to the taxable status of distributions.

.02 This Revenue Procedure provides instructions and guidelines relating to (1) the determination of the taxable status of corporate distributions to stockholders, and (2) the data to be furnished to the Internal Revenue Service with the corporation's U.S. Annual Information Return, Form 1096, in support of the corporate determination of the earnings and profits upon which the taxability of distributions depends. See section 11 for an example of supporting computations.

SEC. 2. EFFECT ON STOCKHOLDERS FEDERAL INCOME TAX RETURNS.

.01 In appropriate situations, the Service will process the returns of stockholders receiving corporate distributions claimed to be partly or wholly not taxable as dividends by relying upon good faith determinations made by the corporation, if such determinations are based upon a bona fide estimation of current year earnings and profits and a computation of accumulated earnings and profits reflecting latest information available at the date of determination. Under this procedure it will be possible in most cases to accept tentative determinations, particularly in the cases of companies which are regulated, those whose stock is widely held, and those companies for which a reasonably current determination of accumulated earnings and profits has been made by the Service. However, in any case in which factors are present indicating that there may be gross inaccuracy in the corporation's determination, the Service will of necessity be required to consider the computations in detail before such determination can be accepted.

SEC. 3. AUTHORITY.

Section 6042(d) of the Internal Revenue Code of 1954 provides, in effect, that a corporation shall furnish, upon request, data necessary for the Service to determine the corporation's available earnings and profits, the names and addresses of the stockholders entitled to such earnings and profits, and the amount paid to each.

SEC. 4. SCOPE.

This Revenue Procedure is applicable in (1) determining taxable status of distributions coming within the provisions of section 301 of the Code, (2) the computation of earnings and profits of liquidated corporations whose stockholders have elected to claim the benefits of section 333 of the Code, and (3) any situation when it is necessary to determine earnings and profits as provided in section 316(a)(1) and (2) of the Code.

SEC. 5. BACKGROUND AND GENERAL.

.01 The taxable status of corporate distributions in the hands of the stockholder is determined by the source of the distribution.

.02 Under all Revenue Acts since 1936 (section 316 of the 1954 Code and similar provisions of prior acts), a "dividend" means any distribution of property made by a corporation to its stockholders-- (a) out of earnings and profits accumulated after February 28, 1913, available at the date of payment, or

(b) out of earnings and profits of the current year in which paid.

However, under the Revenue Acts from 1913 to 1936 (with certain exceptions in the years 1913-1917), a corporate distribution was taxable as a dividend only to the extent of (a) above. That portion of the distribution which is not a "dividend" but which exceeds the adjusted basis of the stock in the hands of the stockholder is treated as gain from the sale or exchange of property. However, to the extent that such gain is out of increase in value accrued before March 1, 1913, and subsequently realized, it is exempt from tax.

.03 To determine the source of distributions it is necessary to make computations from March 1, 1913, or date of incorporation, whichever is later, of:

(a) the current earnings and profits of each year;

(b) the earnings and profits accumulated after February 28, 1913 (referred to as post-1913 earnings and profits);

(c) the March 1, 1913 earned surplus;

(d) the appreciation at March 1, 1913, subsequently realized.

.04 Historical year-by-year computations are necessary for a number of reasons. The most significant are:

(a) distributions from any source other than post-1913 earnings and profits do not create a deficit in post-1913 earnings and profits;

(b) earnings and profits and deficits in earnings and profits carried over from transferor corporations under section 381 of the 1954 Code may not be combined with the accumulated earnings and profits existing at the time of transfer but must be carried forward separately year-by-year since deficits at any carry-over date may be used only to offset earnings and profits accumulated after the date of transfer;

(c) adjustments for any prior years may alter such prior year balances and determinations and have varying effects over the subsequent years due to the absence of a statute of limitations with respect to earnings and profits; and

(d) the sequence of application of (1) deficits in accumulated earnings and profits, (2) current year deficits, and (3) distributions not out of post-1913 earnings and profits, to the following sources, namely: accumulated pre-1913 realized appreciation, pre-1913 appreciation realized in the current year, and pre-1913 earned surplus, varies depending upon which of these sources is available at the time of application.

.05 The data herein described is needed in order to enable the Service to test the accuracy of the corporation's determinations and minimize the time required for verification. Use of the format illustrated in section 11 will also facilitate timely verifications. For example, this format permits adjustments to be reflected in the appropriate year and easily carried forward when necessary. In the same manner computations can be readily updated for later years.

.06 To provide additional assistance to taxpayers, it is contemplated that substantive rulings and other technical information which affect or relate to earnings and profits will be published in the Internal Revenue Bulletin from time to time.

SEC. 6. INFORMATION NEEDED.

.01 General information.

1 The name, address and date of incorporation of the payor corporation and of any other corporation whose assets were transferred to the payor corporation or its predecessors either in a tax free reorganization or tax free corporate liquidation. If transfers are involved, the date of each.

2 The name, address and date of incorporation of any corporation which distributed stock of any of the corporations identified in section 6.011, as a tax free distribution within the meaning of section 355 of the 1954 Code together with details of the transactions and dates of distribution.

3 The office of the Service where all corporations identified in sections 6.011 and 6.012 filed Federal income tax returns and the name and address under which returns were filed for all years since incorporation.

.02 Computations and suggestions as to format.

1 A detailed year-by-year analysis of post-1913 earnings and profits (from date of incorporation or March 1, 1913, whichever is later, through the latest year for which a return has been prepared) reconciled with the beginning and ending surplus shown on the balance sheets on Schedule L of the returns. Revenue agent's adjustments and other Schedule M entries should be shown in detail; also the date distributions were paid, class of stock on which paid and amount paid per share. When payment is made other than in cash, show cost or other basis and fair market value of property distributed. In addition, show the number of shares of stock (1) held by individuals, and (2) held by corporations with respect to which the distribution in kind was made. See exhibit A in section 11. See, however, section 6.05 when the required data has been submitted for prior years.

2 A computation of the estimated earnings and profits of the current year when the determination is made before the corporation's return has been prepared. The data used in estimations should be consistent with that to be used in the preparation of the corporate return.

3 A summary of the differences reconciling the final amount of earnings and profits and the surplus on the balance sheet on the return for the given period. See exhibit B in section 11.

4 Schedule of supporting detail of differences shown on the summary of year-by-year differences. Items which offset each other in the year-by-year analysis should not be shown in this summary, even though offset in different years. In any one year, items of the same category (for example a number of items affecting depreciation) may be grouped and only the balance shown. See exhibit B in section 11.

5 Tax Basis Balance Sheet. Show application of the net differences to balance sheet items as shown on Schedule L of corporate return. Explain any further adjustments necessary to arrive at tax basis balance sheet. See exhibits B and C in section 11. When the amount of earnings and profits of the current year is an estimate and a tax basis balance sheet cannot yet be prepared, the current year detail is not to be reflected in the summaries. In such cases, the tax basis balance sheet is to be prepared as of the close of the preceding taxable year.

.03 Specific and explanatory information.

1 A detailed analysis of the capital stock account and the paid-in surplus and capital surplus accounts.

2 A detailed analysis of any surplus reserves (that is other accounts where entries have been made which do not affect taxable income but may affect earnings and profits).

3 List of any corporate distributions received which were not treated as taxable dividends.

4 If the corporation was formed prior to March 1, 1913, or has assets with a basis determined by reference to their fair market value at March 1, 1913, a year-by-year analysis of pre-March 1, 1913 appreciation subsequently realized within the meaning of section 312 of the 1954 Code or similar provisions of prior laws. Furnish balance sheets as of March 1, 1913, showing cost, value of assets, and the amount of such appreciation.

5 For each year for which a consolidated return has been filed, submit complete details with respect to:

(a) intercompany profits and losses which were eliminated from consolidated taxable income;

(b) computation of the allocation of consolidated Federal income tax;

(c) treatment of any payment for Federal income taxes where such payment differs from amounts computed, as prescribed under the method of allocation elected under section 1552 of the 1954 Code and published General Counsel Memoranda for prior years; and

(d) separate company taxable income and surplus of all companies in this consolidation if the corporate returns do not contain such information.

6 The amount of cost depletion allowable in computing earnings and profits if percentage or discovery depletion is a factor in computing taxable income.

7 When the amount of cost depletion which has been used in the computation of taxable income differs from that which is appropriate for computing earnings and profits, furnish the appropriate figure for cost depletion which is to be used for earnings and profits purposes.

8 Where earnings and profits have been allocated in divisive reorganizations, explain the method used for allocation and the rationale supporting such method.

9 Journal entries recording acquisitions in tax free liquidations and reorganizations.

10 If the corporation has outstanding more than one class of preferred or common stock, furnish a statement of preferences attaching to each class.

.04 The computations and information specified in 6.02 and 6.03 should be furnished for all corporations identified in sections 6.011 and 6.012.

.05 Where the required data has been submitted for prior years it will be necessary only to extend the schedules previously submitted. However, revised computations or schedules of adjusted balances are to be furnished showing the effects of any changes to prior balances and distributions required because of revenue agents adjustments, errors, court decisions, etc.

SEC. 7. SUGGESTED FORMAT.

.01 Use of the format as shown in exhibits A through D of section 11 will greatly facilitate timely Service verification of corporate determinations. Legible, longhand work sheets on columnar paper, facsimiles or photocopies are preferable. However, if typewritten work sheets are furnished it is very important for ease of verification that they be prepared on lined paper.

.02 Items in the year-by-year analysis should be reflected in the order shown in exhibit A of section 11. The opening and closing amounts in Schedule M columns should agree with the surplus shown in the balance sheets in Schedule L of the corporate return. Revenue agents' adjustments should follow in the earnings and profits columns immediately after taxable income per the return and the column sub-totaled to show the corrected taxable income to facilitate verification. Items should be entered on the same line in Schedule M and earnings and profits columns only if they are exactly the same amount; otherwise, the amounts should be listed on separate lines to facilitate compiling the differences between the book surplus and earnings and profits.

.03 When adjustments affecting earnings and profits for earlier years will not affect the taxable status of distributions in intervening years they may be reflected in later years but footnoted to indicate the year to which they properly relate. In the earlier year, notation should be made of the subsequent year in which the adjustment is reflected.

.04 In all years before 1936 (and in years after 1936 if there is a current year deficit) where it is necessary to determine the accumulated earnings and profits at the date of the distribution, the proration of the then current year earnings and profits or deficit should be shown.

.05 The differences in exhibit B (see section 6.023) should be keyed to the adjustment column on exhibit C--Balance Sheets. Full explanation should be made for all other adjustments made to arrive at the tax basis balance sheet.

.06 The various sources of distributions which must be maintained in separate computations (for example, pre-1913 appreciation or deficits of transferor corporations) may be shown in separate columns on the year-by-year analysis of post-1913 earnings and profits or may be shown in separate exhibits.

SEC. 8. WHEN AND WHERE TO FILE DATA.

When a corporation determines that its distributions are partly or wholly not taxable as dividends, the data supporting the corporate determination should be filed with the Earnings and Profits Section, Tax Rulings Division, Internal Revenue Service, Washington, D.C., 20224, on or before February 28 with the lower portion of Form 1096, U.S. Annual Information Return. If any corporation finds that furnishing such information will impose a severe hardship because of insufficient time for making necessary computations, this data, but not the Form 1096 itself, may be submitted on or before April 30, 1965, if accompanied by a statement that additional time was needed.

SEC. 9. REQUESTS FOR ADDITIONAL TIME FOR SUPPLYING DATA.

Requests for additional time for filing information and data requested herein with respect to years after 1964 should be addressed to the Director, Tax Rulings Division, T:R:C:EP, Washington, D.C., 20224.

SEC. 10. INQUIRIES.

Inquiries in connection with this Revenue Procedure should be submitted to the Director, Tax Rulings Division, T:R:C:EP, Washington, D.C., 20224. Information may also be obtained by telephoning the Earnings and Profits Section in Washington, D.C., area code 202, WOrth 4-3417.

SEC. 11. EXAMPLE OF A COMPUTATION--EXHIBITS A THROUGH D.

Exhibit A--P Corporation Year-by-Year Analysis of Earnings and Profits.

Exhibit B--P Corporation Summary of Year-by-Year Differences--Surplus and Earnings and Profits and Schedule of Supporting Detail.

Exhibit C--P Corporation Balance Sheets--December 31, 1960.

Exhibit D--S Corporation Balance Sheets--April 30, 1959.

 [Exhibits A-D as they appear in 1965-1, C.B., 744-50, can not be