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Internal Revenue Code · 26 U.S.C.

§ 312. Effect on earnings and profits

In force Text current through Public Law 119-121 (October 9, 2026) release point 119-121

Official text, no changes From the Office of the Law Revision Counsel, release point 119-121 (current through Public Law 119-121 (October 9, 2026)). Compare it with the official text at uscode.house.gov (external site).

Cite as 26 U.S.C. § 312

At a glance

Read from the text, the source credit and the official notes. Not part of the law.

Status
In force
Enacted
February 2, 1962 by Pub. L. 87–403
Last amended
August 16, 2022 by Pub. L. 117–169
Amendments
23 dated changes in the source credit
Length
15 subsections · 3,270 words · about 14 min to read
Defines
6 terms
Cross-references
cites 25; cited by 5 Code sections and 18 other regulations
Regulations
13 issued under this section
(a) General rule Except as otherwise provided in this section, on the distribution of property by a corporation with respect to its stock, the earnings and profits of the corporation (to the extent thereof) shall be decreased by the sum of—
(1) the amount of money,
(2) the principal amount of the obligations of such corporation (or, in the case of obligations having original issue discount, the aggregate issue price of such obligations), and
(3) the adjusted basis of the other property, so distributed.
(b) Distributions of appreciated property On the distribution by a corporation, with respect to its stock, of any property (other than an obligation of such corporation) the fair market value of which exceeds the adjusted basis thereof—
(1) the earnings and profits of the corporation shall be increased by the amount of such excess, and
(2) subsection (a)(3) shall be applied by substituting “fair market value” for “adjusted basis”.
For purposes of this subsection and subsection (a), the adjusted basis of any property is its adjusted basis as determined for purposes of computing earnings and profits.
(c) Adjustments for liabilities In making the adjustments to the earnings and profits of a corporation under subsection (a) or (b), proper adjustment shall be made for—
(1) the amount of any liability to which the property distributed is subject, and
(2) the amount of any liability of the corporation assumed by a shareholder in connection with the distribution.
(d) Certain distributions of stock and securities
(1) In general The distribution to a distributee by or on behalf of a corporation of its stock or securities, of stock or securities in another corporation, or of property, in a distribution to which this title applies, shall not be considered a distribution of the earnings and profits of any corporation—
(A) if no gain to such distributee from the receipt of such stock or securities, or property, was recognized under this title, or
(B) if the distribution was not subject to tax in the hands of such distributee by reason of section 305(a).
(2) Stock or securities

For purposes of this subsection, the term “stock or securities” includes rights to acquire stock or securities.

[(e) Repealed. Pub. L. 98–369, div. A, title I, § 61(a)(2)(B), July 18, 1984, 98 Stat. 581]
(f) Effect on earnings and profits of gain or loss and of receipt of tax-free distributions
(1) Effect on earnings and profits of gain or loss The gain or loss realized from the sale or other disposition (after February 28, 1913) of property by a corporation—
(A) for the purpose of the computation of the earnings and profits of the corporation, shall (except as provided in subparagraph (B)) be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain, except that no regard shall be had to the value of the property as of March 1, 1913; but
(B) for purposes of the computation of the earnings and profits of the corporation for any period beginning after February 28, 1913, shall be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for determining gain.
Gain or loss so realized shall increase or decrease the earnings and profits to, but not beyond, the extent to which such a realized gain or loss was recognized in computing taxable income under the law applicable to the year in which such sale or disposition was made. Where, in determining the adjusted basis used in computing such realized gain or loss, the adjustment to the basis differs from the adjustment proper for the purpose of determining earnings and profits, then the latter adjustment shall be used in determining the increase or decrease above provided. For purposes of this subsection, a loss with respect to which a deduction is disallowed under section 1091 (relating to wash sales of stock or securities), or the corresponding provision of prior law, shall not be deemed to be recognized.
(2) Effect on earnings and profits of receipt of tax-free distributions Where a corporation receives (after February 28, 1913) a distribution from a second corporation which (under the law applicable to the year in which the distribution was made) was not a taxable dividend to the shareholders of the second corporation, the amount of such distribution shall not increase the earnings and profits of the first corporation in the following cases:
(A) no such increase shall be made in respect of the part of such distribution which (under such law) is directly applied in reduction of the basis of the stock in respect of which the distribution was made; and
(B) no such increase shall be made if (under such law) the distribution causes the basis of the stock in respect of which the distribution was made to be allocated between such stock and the property received (or such basis would, but for section 307(b), be so allocated).
(g) Earnings and profits—increase in value accrued before March 1, 1913
(1) If any increase or decrease in the earnings and profits for any period beginning after February 28, 1913, with respect to any matter would be different had the adjusted basis of the property involved been determined without regard to its March 1, 1913, value, then, except as provided in paragraph (2), an increase (properly reflecting such difference) shall be made in that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913.
(2) If the application of subsection (f) to a sale or other disposition after February 28, 1913, results in a loss which is to be applied in decrease of earnings and profits for any period beginning after February 28, 1913, then, notwithstanding subsection (f) and in lieu of the rule provided in paragraph (1) of this subsection, the amount of such loss so to be applied shall be reduced by the amount, if any, by which the adjusted basis of the property used in determining the loss exceeds the adjusted basis computed without regard to the value of the property on March 1, 1913, and if such amount so applied in reduction of the decrease exceeds such loss, the excess over such loss shall increase that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913.
(h) Allocation in certain corporate separations and reorganizations
(1) Section 355

In the case of a distribution or exchange to which section 355 (or so much of section 356 as relates to section 355) applies, proper allocation with respect to the earnings and profits of the distributing corporation and the controlled corporation (or corporations) shall be made under regulations prescribed by the Secretary.

(2) Section 368(a)(1)(C) or (D)

In the case of a reorganization described in subparagraph (C) or (D) of section 368(a)(1), proper allocation with respect to the earnings and profits of the acquired corporation shall, under regulations prescribed by the Secretary, be made between the acquiring corporation and the acquired corporation (or any corporation which had control of the acquired corporation before the reorganization).

(i) Distribution of proceeds of loan insured by the United States If a corporation distributes property with respect to its stock and if, at the time of distribution—
(1) there is outstanding a loan to such corporation which was made, guaranteed, or insured by the United States (or by any agency or instrumentality thereof), and
(2) the amount of such loan so outstanding exceeds the adjusted basis of the property constituting security for such loan,
then the earnings and profits of the corporation shall be increased by the amount of such excess, and (immediately after the distribution) shall be decreased by the amount of such excess. For purposes of paragraph (2), the adjusted basis of the property at the time of distribution shall be determined without regard to any adjustment under section 1016(a)(2) (relating to adjustment for depreciation, etc.). For purposes of this subsection, a commitment to make, guarantee, or insure a loan shall be treated as the making, guaranteeing, or insuring of a loan.
[(j) Repealed. Pub. L. 108–357, title IV, § 413(c)(4), Oct. 22, 2004, 118 Stat. 1507]
(k) Effect of depreciation on earnings and profits
(1) General rule

For purposes of computing the earnings and profits of a corporation for any taxable year beginning after June 30, 1972, the allowance for depreciation (and amortization, if any) shall be deemed to be the amount which would be allowable for such year if the straight line method of depreciation had been used for each taxable year beginning after June 30, 1972.

(2) Exception

If for any taxable year a method of depreciation was used by the taxpayer which the Secretary has determined results in a reasonable allowance under section 167(a) and which is the unit-of-production method or other method not expressed in a term of years, then the adjustment to earnings and profits for depreciation for such year shall be determined under the method so used (in lieu of the straight line method).

(3) Exception for tangible property
(A) In general

Except as provided in subparagraph (B), in the case of tangible property to which section 168 applies, the adjustment to earnings and profits for depreciation for any taxable year shall be determined under the alternative depreciation system (within the meaning of section 168(g)(2)).

(B) Treatment of amounts deductible under section 179, 179B, 179C, 179D, or 179E
(i) In general

For purposes of computing the earnings and profits of a corporation, except as provided in clause (ii), any amount deductible under section 179, 179B, 179C, 179D, or 179E shall be allowed as a deduction ratably over the period of 5 taxable years (beginning with the taxable year for which such amount is deductible under section 179, 179B, 179C, 179D, or 179E, as the case may be).

(ii) Special rule

In the case of a corporation that is a real estate investment trust, any amount deductible under section 179D shall be allowed in the year in which the property giving rise to such deduction is placed in service (or, in the case of energy efficient building retrofit property, the year in which the qualifying final certification is made).

(4) Certain foreign corporations

The provisions of paragraph (1) shall not apply in computing the earnings and profits of a foreign corporation for any taxable year for which less than 20 percent of the gross income from all sources of such corporation is derived from sources within the United States.

(5) Basis adjustment not taken into account

In computing the earnings and profits of a corporation for any taxable year, the allowance for depreciation (and amortization, if any) shall be computed without regard to any basis adjustment under section 50(c).

(l) Discharge of indebtedness income
(1) Does not increase earnings and profits if applied to reduce basis

The earnings and profits of a corporation shall not include income from the discharge of indebtedness to the extent of the amount applied to reduce basis under section 1017.

(2) Reduction of deficit in earnings and profits in certain cases If—
(A) the interest of any shareholder of a corporation is terminated or extinguished in a title 11 or similar case (within the meaning of section 368(a)(3)(A)), and
(B) there is a deficit in the earnings and profits of the corporation,
then such deficit shall be reduced by an amount equal to the paid-in capital which is allocable to the interest of the shareholder which is so terminated or extinguished.
(m) No adjustment for interest paid on certain registration-required obligations not in registered form

The earnings and profits of any corporation shall not be decreased by any interest with respect to which a deduction is not or would not be allowable by reason of section 163(f), unless at the time of issuance the issuer is a foreign corporation that is not a controlled foreign corporation (within the meaning of section 957) and the issuance did not have as a purpose the avoidance of section 163(f) of this subsection 11 Subsec. (m) was enacted without a period at the end.

(n) Adjustments to earnings and profits to more accurately reflect economic gain and loss For purposes of computing the earnings and profits of a corporation, the following adjustments shall be made:
(1) Construction period carrying charges
(A) In general In the case of any amount paid or incurred for construction period carrying charges—
(i) no deduction shall be allowed with respect to such amount, and
(ii) the basis of the property with respect to which such charges are allocable shall be increased by such amount.
(B) Construction period carrying charges defined For purposes of this paragraph, the term “construction period carrying charges” means all—
(i) interest paid or accrued on indebtedness incurred or continued to acquire, construct, or carry property,
(ii) property taxes, and
(iii) similar carrying charges,
to the extent such interest, taxes, or charges are attributable to the construction period for such property and would be allowable as a deduction in determining taxable income under this chapter for the taxable year in which paid or incurred.
(C) Construction period

The term “construction period” has the meaning given the term production period under section 263A(f)(4)(B).22 See References in Text note below.

(2) Intangible drilling costs and mineral exploration and development costs
(A) Intangible drilling costs Any amount allowable as a deduction under section 263(c) in determining taxable income (other than costs incurred in connection with a nonproductive well)—
(i) shall be capitalized, and
(ii) shall be allowed as a deduction ratably over the 60-month period beginning with the month in which such amount was paid or incurred.
(B) Mineral exploration and development costs Any amount allowable as a deduction under section 616(a) or 617 in determining taxable income—
(i) shall be capitalized, and
(ii) shall be allowed as a deduction ratably over the 120-month period beginning with the later of—
(I) the month in which production from the deposit begins, or
(II) the month in which such amount was paid or incurred.
(3) Certain amortization provisions not to apply

Sections 173 and 248 shall not apply.

(4) LIFO inventory adjustments
(A) In general

Earnings and profits shall be increased or decreased by the amount of any increase or decrease in the LIFO recapture amount as of the close of each taxable year; except that any decrease below the LIFO recapture amount as of the close of the taxable year preceding the 1st taxable year to which this paragraph applies to the taxpayer shall be taken into account only to the extent provided in regulations prescribed by the Secretary.

(B) LIFO recapture amount For purposes of this paragraph, the term “LIFO recapture amount” means the amount (if any) by which—
(i) the inventory amount of the inventory assets under the first-in, first-out method authorized by section 471, exceeds
(ii) the inventory amount of such assets under the LIFO method.
(C) Definitions For purposes of this paragraph—
(i) LIFO method

The term “LIFO method” means the method authorized by section 472 (relating to last-in, first-out inventories).

(ii) Inventory assets

The term “inventory assets” means stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year.

(iii) Inventory amount The inventory amount of assets under the first-in, first-out method authorized by section 471 shall be determined—
(I) if the corporation uses the retail method of valuing inventories under section 472, by using such method, or
(II) if subclause (I) does not apply, by using cost or market, whichever is lower.
(5) Installment sales

In the case of any installment sale, earnings and profits shall be computed as if the corporation did not use the installment method.

(6) Completed contract method of accounting

In the case of a taxpayer who uses the completed contract method of accounting, earnings and profits shall be computed as if such taxpayer used the percentage of completion method of accounting.

(7) Redemptions

If a corporation distributes amounts in a redemption to which section 302(a) or 303 applies, the part of such distribution which is properly chargeable to earnings and profits shall be an amount which is not in excess of the ratable share of the earnings and profits of such corporation accumulated after February 28, 1913, attributable to the stock so redeemed.

(8) Special rule for certain foreign corporations In the case of a foreign corporation described in subsection (k)(4)—
(A) paragraphs (4) and (6) shall apply only in the case of taxable years beginning after December 31, 1985, and
(B) paragraph (5) shall apply only in the case of taxable years beginning after December 31, 1987.
(o) Definition of original issue discount and issue price for purposes of subsection (a)(2)

For purposes of subsection (a)(2), the terms “original issue discount” and “issue price” have the same respective meanings as when used in subpart A of part V of subchapter P of this chapter.

(Aug. 16, 1954, ch. 736, 68A Stat. 95; Pub. L. 87–403, § 3(a), Feb. 2, 1962, 76 Stat. 6; Pub. L. 87–834, §§ 13(f)(3), 14(b)(1), Oct. 16, 1962, 76 Stat. 1035, 1040; Pub. L. 88–272, title II, § 231(b)(3), Feb. 26, 1964, 78 Stat. 105; Pub. L. 88–484, § 1(b)(1), Aug. 22, 1964, 78 Stat. 597; Pub. L. 89–570, § 1(b)(3), Sept. 12, 1966, 80 Stat. 762; Pub. L. 91–172, title II, § 211(b)(3), title IV, § 442(a), title IX, § 905(b)(2), Dec. 30, 1969, 83 Stat. 570, 628, 714; Pub. L. 94–455, title II, § 205(c)(1)(D), title XIX, §§ 1901(a)(43), (b)(32)(B)(i), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1535, 1771, 1800, 1834; Pub. L. 95–628, § 3(c), Nov. 10, 1978, 92 Stat. 3627; Pub. L. 96–589, § 5(f), Dec. 24, 1980, 94 Stat. 3406; Pub. L. 97–34, title II, § 206(a), (b), Aug. 13, 1981, 95 Stat. 224; Pub. L. 97–248, title II, §§ 205(a)(3), 222(e)(3), title III, § 310(b)(3), Sept. 3, 1982, 96 Stat. 429, 480, 597; Pub. L. 97–448, title III, § 306(a)(6)(B), Jan. 12, 1983, 96 Stat. 2402; Pub. L. 98–369, div. A, title I, §§ 61(a)–(c)(1), 63(b), 111(e)(5), July 18, 1984, 98 Stat. 579–581, 583, 633; Pub. L. 99–121, title I, § 103(b)(1)(C), Oct. 11, 1985, 99 Stat. 509; Pub. L. 99–514, title II, §§ 201(b), (d)(6), 241(b)(1), title VI, § 631(e)(1), title VIII, § 803(b)(3), title XVIII, §§ 1804(f)(1)(A)–(E), 1809(a)(2)(C)(ii), Oct. 22, 1986, 100 Stat. 2137, 2141, 2181, 2273, 2355, 2804, 2805, 2819; Pub. L. 100–647, title I, §§ 1002(a)(3), 1018(d)(4), (u)(4), Nov. 10, 1988, 102 Stat. 3353, 3578, 3590; Pub. L. 101–239, title VII, §§ 7611(f)(5)(A), 7811(m)(2), Dec. 19, 1989, 103 Stat. 2373, 2412; Pub. L. 101–508, title XI, §§ 11812(b)(5), 11813(b)(14), Nov. 5, 1990, 104 Stat. 1388–535, 1388–555; Pub. L. 105–34, title XVI, § 1604(a)(2), Aug. 5, 1997, 111 Stat. 1097; Pub. L. 108–357, title III, § 338(b)(3), title IV, § 413(c)(4), (5), Oct. 22, 2004, 118 Stat. 1481, 1507; Pub. L. 109–58, title XIII, §§ 1323(b)(3), 1331(b)(5), Aug. 8, 2005, 119 Stat. 1015, 1024; Pub. L. 109–432, div. A, title IV, § 404(b)(2), Dec. 20, 2006, 120 Stat. 2956; Pub. L. 113–295, div. A, title II, § 221(a)(34)(F), (49), Dec. 19, 2014, 128 Stat. 4042, 4045; Pub. L. 117–169, title I, § 13303(b), Aug. 16, 2022, 136 Stat. 1951.)

Terms defined here

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Regulations under this section

Treasury regulations (26 CFR) issued under § 312

Cross-references

Computed from the citations in the text of Title 26 and 26 CFR.

This section cites 25 other sections

Show 1 more

Cited by 5 Code sections

Cited in 18 regulations not issued under it

Amendment history

From the source credit and the official notes, newest first.

  1. Amended by Pub. L. 117–169Parts changed in 2022: (k)(3)(B)
  2. Amended by Pub. L. 113–295Parts changed in 2014: (d)(2) (k)(3)(B)
  3. Amended by Pub. L. 109–432Parts changed in 2006: (k)(3)(B)
  4. Amended by Pub. L. 109–58Parts changed in 2005: (k)(3)(B)
  5. Amended by Pub. L. 108–357Parts changed in 2004: (j) (k)(3)(B) (m)
  6. Amended by Pub. L. 105–34Parts changed in 1997: (k)(3)(B)
  7. Amended by Pub. L. 101–508Parts changed in 1990: (k)(2) (k)(5)
  8. Amended by Pub. L. 101–239Parts changed in 1989: (b) (n)(2)(A)(ii)
  9. Amended by Pub. L. 100–647Parts changed in 1988: (b) (k)(4) (n)(1)(B)
  10. Amended by Pub. L. 99–514Parts changed in 1986: (b) (c) (k)(3) (k)(3)(A) (k)(4) (n)(1)(B) (n)(1)(C) (n)(3) (n)(4) (n)(5) (n)(8)
  11. Amended by Pub. L. 99–121Parts changed in 1985: (k)(3)(A)
  12. Amended by Pub. L. 98–369Parts changed in 1984: (a)(2) (e) (h) (j)(3) (k)(3)(A) (n) (o)
  13. Amended by Pub. L. 97–448Parts changed in 1983: (j)(3)
  14. Amended by Pub. L. 97–248Parts changed in 1982: (e) (k)(5) (m)
  15. Amended by Pub. L. 97–34Parts changed in 1981: (k)(3)
  16. Amended by Pub. L. 96–589Parts changed in 1980: (l)
  17. Amended by Pub. L. 95–628Parts changed in 1978: (c)(3)
  18. Amended by Pub. L. 94–455Parts changed in 1976: (c)(3) (d)(1) (h) (i) (j) (k) (l) (m)
  19. Amended by Pub. L. 91–172Parts changed in 1969: (c)(3) (m)
  20. Amended by Pub. L. 89–570Parts changed in 1966: (c)(3)
  21. Amended by Pub. L. 88–484Parts changed in 1964: (c)(3)
  22. Amended by Pub. L. 88–272
  23. Amended by Pub. L. 87–834Parts changed in 1962: (c)(3) (k) (l)
  24. Enacted by Pub. L. 87–403

Where it sits in the Code

  1. Subtitle A Income Taxes
  2. Chapter 1 NORMAL TAXES AND SURTAXES
  3. Subchapter C Corporate Distributions and Adjustments
  4. Part I DISTRIBUTIONS BY CORPORATIONS
  5. Subpart B Effects on Corporation

Nearby sections

Official notes

The Law Revision Counsel's notes for this section (amendments, effective dates and related laws) are long, so they have their own page.