The adjustments provided in section 312(c) may be illustrated by the following examples:
Example 1.On 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).Example 2.The 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.Example 3.Corporation 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:
| “Fifo” basis of inventory | $50,000 | |
| Less: “Lifo” basis of inventory | 46,000 | |
| Gain recognized—addition to earnings and profits (section 311(b)) | $4,000 |
| Adjustment to earnings and profits required by section 312(b)(1)(A): | | |
| Fair market value of inventory | $55,000 | |
| Less: “Lifo” basis plus adjustment under section 311(b) | 50,000 | 5,000 |
| Total increase in earnings and profits | 9,000 |
| Decrease in earnings and profits—under section 312(b)(1)(B)(i) | $55,000 | |
| Less: Liability assumed | 35,000 | |
| Net amount of distribution (decrease in earnings) | 20,000 |
| Net decrease in earnings and profits | 11,000 |