REG, Regulation

Sources for C Corporations: Formation, E and P, and Liquidation

Last reviewed 2026-09-14

The standards and authorities behind PocketCPA's REG lessons on C Corporations: Formation, E and P, and Liquidation. The topic rests on IRC Subchapter C; Secs. 11, 170, 172, 243, 246, 248, 448, 1211, 1212, 6655.

About this topic

The company pays tax on its profit. The owners then pay tax again when that profit is handed out to them. That double layer is what a C corporation is. It is a separate taxpayer: it computes its own income, pays its own tax, and its shareholders are taxed again when earnings come out. Subchapter C governs the life cycle from formation to liquidation.

Key points

A Sec. 351 transfer is tax-free when property is transferred solely for stock and the transferors have 80% control immediately after.
Earnings and profits (E&P) determine whether a corporate distribution is a dividend, return of capital, or capital gain.
A complete liquidation under Sec. 331 is treated as a sale or exchange of stock by the shareholder.
A Sec. 332 subsidiary liquidation is tax-free to an 80%-or-more parent corporation.

What the lessons cover

Formation under Sec. 351
Earnings and profits and dividends
Dividends-received deduction and NOLs
Tax computation and liquidation
Redemptions and the Sec. 318 attribution rules
Corporate charitable contributions and capital losses
Penalty taxes, accounting method, and estimated payments

Authoritative references

Primary law, quote-checked against the statutory text of Title 26 unless otherwise noted.

Formation and basis

Sec. 351(a) nonrecognition; (b)(1) gain capped at money plus the FMV of other property; (b)(2) no loss ever. (d)(1), (2), (3) services, non-security transferee debt and accrued interest are not property; (g)(1) nonqualified preferred stock is not stock.
Sec. 368(c) control: 80 percent of combined voting power and 80 percent of the shares of each other class.
Sec. 357(a) a liability assumption is not money or other property; (b)(1) no bona fide business purpose makes the whole liability money received. (c)(1) liabilities over aggregate basis are gain; (c)(3)(A), (B) deductible liabilities excluded unless their incurrence created basis.
Sec. 358(a)(1) substituted stock basis; (a)(2) boot property at FMV; (d)(1), (2) assumed liabilities are money received, except those excluded by Sec. 357(c)(3).
Sec. 362(a) carryover basis plus gain recognized to the transferor; (e)(1) imported built-in loss; (e)(2)(A), (B), (C) aggregate basis capped at aggregate FMV, allocated by built-in loss, with an election to hit stock basis instead.
Sec. 248 carries organizational expenditures. Sec. 170(b)(2)(D)(ii) excepts Sec. 248 from the part VIII add-back.
- Sec. 248(a)(1)(A), (B) the lesser of the organizational expenditures or $5,000 reduced (but not below zero) by the excess over $50,000, deductible for the year business begins.
- (a)(2) the remainder ratably over the 180-month period beginning with the month business begins.
- (b)(1), (2), (3) incident to the creation of the corporation, chargeable to capital account, and amortizable over the life of a limited-life corporation.
- (c) the election is due by the time prescribed for filing the return for that year, including extensions, and binds all subsequent years.

Distributions and E and P

Sec. 316(a)(1), (2) dividend out of accumulated or current E and P, current E and P computed at the close of the year without regard to E and P at the distribution date.
Sec. 301(b)(1), (2), (3) amount distributed, reduced for liabilities, valued at the distribution date; (c)(1), (2), (3)(A) the three tiers; (d) shareholder basis equals FMV.
Sec. 311(a), (b)(1) no corporate gain or loss, except gain on appreciated property.
Sec. 312(a), (b), (k)(1) E and P reduced by money and the adjusted basis (FMV for appreciated property) of property distributed, with straight line depreciation.
Sec. 317(b) redemption defined.

Redemptions

Sec. 302 carries the redemption tests. Sec. 302(a) exchange treatment where a Sec. 302(b) paragraph applies; (b)(1) not essentially equivalent to a dividend; (b)(2)(A), (B), (C), (D) substantially disproportionate, the under-50-percent voting ceiling, and the series block. (b)(3) complete termination; (b)(4) partial liquidation of a noncorporate shareholder; (c)(1) Sec. 318(a) applies; (c)(2)(A), (B) the family attribution waiver and its disqualifications; (d) failure means a Sec. 301 distribution.
Sec. 302(e) defines a partial liquidation.
- Sec. 302(e)(1)(A), (B) dividend inequivalence determined at the corporate rather than the shareholder level, pursuant to a plan, in the plan year or the succeeding year.
- (e)(2)(A), (B) the non-exclusive safe harbor of ceasing one qualified trade or business while remaining actively engaged in another.
- (e)(3)(A), (B) qualified trade or business, actively conducted throughout the 5-year period ending on the redemption date and not acquired in that period in a taxable transaction.
- (e)(4) pro rata status is disregarded.
- (e)(5) stock held by a partnership, estate or trust is treated as held proportionately by its partners or beneficiaries for the noncorporate-shareholder condition.
Sec. 318(a)(1)(A), (B) spouse, children, grandchildren, parents, adopted children; (a)(2)(A), (B) attribution from partnerships, estates and trusts.

Liquidations

Sec. 331(a), (b), (c) shareholder exchange treatment, Sec. 301 inapplicable, amount under Sec. 1001.
Sec. 332(a), (b)(1), (b)(2) nonrecognition to a parent meeting Sec. 1504(a)(2) continuously from plan adoption to receipt.
Sec. 334(a), (b)(1) FMV basis where gain or loss was recognized; carryover basis in a Sec. 332 liquidation.
Sec. 336(a), (b), (d)(1) liquidating corporation recognizes gain and loss at FMV, with the related-person loss limits.
Sec. 337(a), (c) shield for the 80-percent distributee only, which means only a corporation meeting Sec. 332(b).
Sec. 1504(a)(1), (2) affiliated group and the 80-percent vote and value test.

Corporate deductions and computation

Sec. 11(a), (b), (c) flat 21 percent, with subchapter L and M exclusions.
Sec. 243(a)(1), (3) the 50 and 100 percent rates; (b)(1) qualifying dividend; (c)(1), (2) the 65 percent substitution, by vote and value.
Sec. 246(b)(1), (2), (3) the taxable income limitation, its inapplicability in an NOL year, and its two-pass application; (c)(1)(A), (B), (2), (3)(A) the 45-day and 91-day rule, the preference-dividend variant, and day counting.
Sec. 172(a)(2) the 80 percent cap; (b)(1)(A)(i), (ii) carryback only where provided, indefinite carryforward post-2017; (b)(1)(B) the 2-year farming carryback.
Sec. 170(b)(2)(A)(i), (ii) the 1 percent floor and 10 percent ceiling for tax years beginning after December 31, 2025; (b)(2)(D) the base and its five exclusions. (d)(2)(A), (B), (C) the carryforward, its 5-year limit, and the floor-amount rule conditioned on exceeding the ceiling. (b)(1)(H), (b)(1)(I) contribution base and the individual 0.5 percent floor; (a)(2) the accrual-basis payment election. The 1 percent floor was added by the One Big Beautiful Bill Act, Pub. L. 119-21, Sec. 70426(a).
Sec. 1211(a), (b) corporate losses only against capital gains, the $3,000 allowance confined to non-corporations. Sec. 1212(a)(1)(A), (B) the 3-year carryback (blocked where it would create or increase an NOL) and 5-year carryforward, with short-term character and earliest-year ordering.

Penalty taxes, method, and payments

Sec. 531, Sec. 532(a), (b)(1) the 20 percent accumulated earnings tax, its purpose test, and the PHC exclusion.
Sec. 535(a) accumulated taxable income; (b)(1), (2), (3), (4), (5)(A) the adjustments; (c)(1), (2)(A), (B), (3), (4) the reasonable-needs credit, the $250,000 and $150,000 minimums, and the Sec. 563(a) reduction.
Sec. 541, Sec. 542(a)(1), (2) the 20 percent PHC tax and its two tests; Sec. 543(a)(1), (a)(7), (b)(1), (b)(2) PHC income, personal service contracts, and the gross income measures.
Sec. 448(a)(1), (2), (3) the cash-method bar; (b)(1), (2), (3) exceptions relieving only (a)(1) and (a)(2). (c)(1), (4) the gross receipts test over the three years ending with the preceding year, and inflation adjustment of the $25,000,000 base.
Sec. 6655(c)(1), (2) four installments and due dates; (d)(1)(A), (B) 25 percent, lesser of current and prior year; (d)(2)(A), (B) the large-corporation bar and the recaptured first-installment concession. (f) no addition under $500; (g)(1), (2)(A), (B)(i) tax defined, large corporation, and the 3-year testing period.

Grounding notes. Secs. 545, 561 and 563(a) appear only as cross-references inside quote-checked text; no independent content is asserted for them.

Beyond those two grounding qualifications, exactly two substantive matters are left unasserted, and in both cases the reason is that no primary statutory text supports them. First, allocating a current-year E and P deficit between the pre-distribution and post-distribution parts of a year is governed by Treasury regulations, and there is no statutory sentence to quote; only the statutory consequence is stated, which is that a current deficit leaves Sec. 316(a)(1) accumulated E and P as the sole possible source of a dividend. Second, Sec. 302(b)(1) is a bare phrase in the Code: the meaningful-reduction standard that gives it operative content comes from case law and rulings rather than from Sec. 302, so this lesson states the statutory sentence and stops there. Everything else in the sections cited is covered in full above, including Sec. 248 organizational expenditures and the Sec. 302(b)(4) partial-liquidation gateway as defined by Sec. 302(e).

How PocketCPA uses these sources

Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.