{"data":{"id":"us/26-cfr-1.312-4","jurisdiction":"us","citation":"26 CFR 1.312-4","heading":"-4 Examples of adjustments provided in section 312(c).","body":"The adjustments provided in section 312(c) may be illustrated by the following examples:\nExample 1.\nOn December 2, 1954, Corporation X distributed to its sole shareholder, A, an individual, as a dividend in kind a vacant lot which was not an inventory asset. On that date, the lot had a fair market value of $5,000 and was subject to a mortgage of $2,000. The adjusted basis of the lot was $3,100. The amount of the earnings and profits was $10,000. The amount of the dividend received by A is $3,000 ($5,000, the fair market value, less $2,000, the amount of the mortgage) and the reduction in the earnings and profits of Corporation X is $1,100 ($3,100, the basis, less $2,000, the amount of mortgage).\nExample 2.\nThe facts are the same as in Example (1) above with the exception that the amount of the mortgage to which the property was subject was $4,000. The amount of the dividend received by A is $1,000, and there is no reduction in the earnings and profits of the corporation as a result of the distribution (disregarding such reduction as may result from an increase in tax to Corporation X because, of gain resulting from the distribution). There is a gain of $900 recognized to Corporation X, the difference between the basis of the property ($3,100) and the amount of the mortgage ($4,000), under section 311(c) and an increase in earnings and profits of $900.\nExample 3.\nCorporation A, having accumulated earnings and profits of $100,000, distributed in kind to its shareholders, not in liquidation, inventory assets which had a basis to it on the “Lifo” method (section 472) of $46,000 and on the basis of cost or market (section 471) of $50,000. The inventory had a fair market value of $55,000 and was subject to a liability of $35,000. This distribution results in a net decrease in earnings and profits of Corporation A of $11,000, (without regard to any tax on Corporation A) computed as follows:\n“Fifo” basis of inventory $50,000\nLess: “Lifo” basis of inventory 46,000\nGain recognized—addition to earnings and profits (section 311(b)) $4,000\nAdjustment to earnings and profits required by section 312(b)(1)(A):\nFair market value of inventory $55,000\nLess: “Lifo” basis plus adjustment under section 311(b) 50,000 5,000\nTotal increase in earnings and profits 9,000\nDecrease in earnings and profits—under section 312(b)(1)(B)(i) $55,000\nLess: Liability assumed 35,000\nNet amount of distribution (decrease in earnings) 20,000\nNet decrease in earnings and profits 11,000","path":["Title 26—Internal Revenue","CHAPTER I—INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY","SUBCHAPTER A—INCOME TAX","PART 1—INCOME TAXES"],"source_url":"https://www.ecfr.gov/api/versioner/v1/full/2026-08-25/title-26.xml","current_through":"2026-08-25","vintage":"","retrieved_at":"2026-08-27T02:25:11Z","sha256":"a8df9f36e903223fc4560cf6b9bb85c0cd4da35a02e5c3991d654751b5b69a01","source_id":"us-cfr","stale":true,"prev":"us/26-cfr-1.312-3","next":"us/26-cfr-1.312-5"},"notice":"GroundRules: Original legal text. Not legal advice."}