But Like Pornography

Nowhere in the IRC is there a definition of the term “earnings and profits.” Yet Tax Court Judges, the IRS, and most if not all tax practitioners, know it when we see it. And Western Property Restoration, Inc., 2017 T. C. Memo. 190, filed 9/26/17, has enough to hand the Western Restorer some Section 6662 chops and slug sole shareholder Bill with some heavy taxable dividend income (but no chops).

Judge Morrison doesn’t examine the Western Restorer’s books to look for E&P, because IRS and the Western Restorer agree there were, and enough to cover what the Western Restorer paid Bill. But Bill claims that the cash he got (and personal expenses the Western Restorer picked up) was return of capital, therefore reduced his bases but wasn’t taxable.

Bill claims the Western Restorer intended the cash it gave Bill to be return of capital.

Judge Morrison is too polite to give Bill and the Western Restorer a loud “Oh Please!”

“A distribution to a shareholder is a dividend if it is made out of earnings and profits. Sec. 316(a). A distribution is made out of earnings and profits if earnings and profits is at least equal to the amount of the distribution. Id. Western Property Restoration’s earnings and profits for the [year at issue] was at least $82,461, the amount of the distributions it made…. Therefore, the distributions totaling $82,461 are dividends within the meaning of section 316(a). That Western Property Restoration intended the distributions to consist of returned capital is irrelevant. See Boulware v. United States, 552 U.S. 421, 430-431 (2008). It is also irrelevant that the company treated the distributions as returned capital on its books. See id.” 2017 T. C. Memo. 190, at pp. 7-8.

For the legal gibberishly challenged, “Id or “id” means “in the same place.”

Bottom line: If you know it when you see it, it’s probably taxable.