Dividends

[NK]

Question: If treasury stock creates a debit balance in the equity account (against R/E) can a C-Corp. issue dividends out of the R/E (credit balance) or do you have to take into account the treasury stock amount (which netted creates a debit balance)?

Example: R/E 200,000
T/S (400,000)

Equity (200,000)

Can a C-Corp pay dividends against the $ 200,000 or do you have to consider the T/S?

[Roland Slugg]

If treasury stock creates a debit balance in the equity account (against R/E)...

[Emphasis added]

Your premise is incorrect. Treasury stock is not a reduction of retained earnings, but of the corporation's capital section as a whole.

Some states ... perhaps all ... restrict dividends in various ways, of which treasury stock is one of those way. You or a business/corporate lawyer should check with your state's laws on this.

[JON]

Dividends

paid in excess of earnings requires a separate form with the corporate return and is there not a question concerning this under other info????

I do not think a negative equity section requires any state approval. You probably just do have a great financial reason for doing it sine the books are showing liabilities are exceeding assets.

[Snaggletooth]

Doesn't Add Up

This whole conception seems flawed. Treasury stock has nothing to do with Retained Earnings, and if this equity is in a negative position simply because of treasury stock, the retained earnings account should be insulated from this negative position.

For taxation purposes, the repurchase of treasury stock has not impacted earnings and profits. Yes, a C corp has earnings and profits although they are only "tracked" on S corp tax returns. In your example, the $200K is still ripe for full dividend taxation to the extent dividends are paid from it.

If the creation of negative equity were allowed by itself to somehow create "liquidating" dividends, there would sure be a lot of treasury stock being bought back...

[JON]

You used your

retained earnings to purchase treasury stock. Of course it has an effect on the book equity. I do not remember the form, but it is used to identify dividends paid in excess of retained earnings and capital. It used to be important as I think this becomes a Schedule D transaction and the old days (prior to 15% div rate) this could be important. I did this once a long time ago. If I get a couple projects done I will try to take a look at it. I still do not think states have rules on this. As I remember some states used to have minumum capitalzation amounts and that is gone in Minnesota anyway.

[NK]

Nk

retained earnings to purchase treasury stock. Of course it has an effect on the book equity. I do not remember the form, but it is used to identify dividends paid in excess of retained earnings and capital. It used to be important as I think this becomes a Schedule D transaction and the old days (prior to 15% div rate) this could be important. I did this once a long time ago. If I get a couple projects done I will try to take a look at it. I still do not think states have rules on this. As I remember some states used to have minumum capitalzation amounts and that is gone in Minnesota anyway.

I agree with you - I'm not sure how to treat this - a dividend or capital gain distribution. I'm not sure treasury stock can be totally isolated from retained earnings. I was trying to find some literature on this and I haven't been able to come up with anything. I think the Form you're talking about is Form 5452.

[NK]

retained earnings to purchase treasury stock. Of course it has an effect on the book equity. I do not remember the form, but it is used to identify dividends paid in excess of retained earnings and capital. It used to be important as I think this becomes a Schedule D transaction and the old days (prior to 15% div rate) this could be important. I did this once a long time ago. If I get a couple projects done I will try to take a look at it. I still do not think states have rules on this. As I remember some states used to have minumum capitalzation amounts and that is gone in Minnesota anyway.

I agree with you - I'm not sure how to treat this - a dividend or capital gain distribution. I'm not sure treasury stock can be totally isolated from retained earnings. I was trying to find some literature on this and I haven't been able to come up with anything.