To calculate the gain on a C Corporation nonliquidating distribution, it is necessary to understand the relationship between the fair market value (FMV) of the property being distributed. The corporation's adjusted basis in property and how these values are influenced by tax rules. The step-by-step breakdown is presented below:

• The adjusted basis represents the property's value for tax purposes, including any improvements or depreciation adjustments.
• The price of the property when sold by a willing buyer and seller is known as FMV.

• Subtract the adjusted basis from the FMV to calculate the corporation's profit. Gain = Fair Market Value (FMV) adjusted basis. The corporation will earn a gain if the FMV exceeds the adjusted basis, which is typically treated as if the property had been sold. Nonliquidating distributions do not result in a loss for the corporation when the FMV is less than the adjusted basis.

• Depending on the type of property (such as inventory or investment property), the recognized gain is usually treated as either capital gain or ordinary income. The distribution taxation for shareholders is affected by the increase in the corporation's current-year earnings and profits (E&P).

• As the new basis, the recipient shareholder will receive the property at its fair market value. The shareholder is charged taxes on the distribution based on the corporation's E&P, and it could be a dividend, return of capital, or capital gain.

A case study is given below to determine the gain on transfer of a corporation that is not liquidating:

1. Company "O" is a C-Corporation had E&P of $82,000 for the current year before distribution of dividends.
2. On December 31st, the company gave a dividend to its sole stockholder of $12,000 for inventory that had an FMV of $16,000 and an adjusted basis of $12,000.
3. Company "O" uses First in First out (FIFO) method.
4. Corporation Income Tax Rate is 21%.
5. Find out what is the E&P balance at the end of the current year?

Defination of Earnongs and Profits (E&P)?

• The distribution of profits among shareholders by the company is represented by earnings and profits in accounting.
• Earnings and profits are two different types of income. The current earnings and profit and the earnings and profits that have been accrued. Current E&P represents comapny's ability to pay current year's profits to its shareholders whereas accumulated earnings and profit represent the prior year earnings and profits (Retained Earnings) which is yet to be distributed.
• Letter 'E' represents earnings before expenses, while letter 'P' represents profit after the expenses.

Solution:

• The company had an E&P of $82,000 before distributing dividends.
• Due to the distribution of inventory with an FMV of $16,000 and adjusted basis of $12,000, the company earned a taxable gain of $4,000 at a 21% tax rate, yielding $840 ($4,000 x 21%).
• Due to the distribution of E&P, the inventory will decrease.

Result: The E&P is $69,160 (82,000 - $16,000 + $4,000 - $840) after distribution, as per the information provided.

In my youth, I used to refer to E&P as 'Ending Profit' to remember. If you're a student, you can use a nickname to comprehend or memorize.