Reporting Certain Nondividend Distributions on Form 5452

Editor:
Albert B. Ellentuck, Esq.
Of Counsel
King & Nordlinger, L.L.P.
Arlington, VA

Editor’s note: This case study has been adapted from PPC Tax Planning GuideS Corporations, 18th Edition, by Andrew R. Biebl, Gregory B. McKeen, George M. Carefoot and James A. Keller, published by Practitioners Publishing Company, Ft. Worth, TX, 2004 ((800) 3238724; ppc.thomson.com).

Corporations with accumulated earnings and profits (AE&P) must report nondividend (nontaxable) distributions on Form 5452, Corporate Report of Nondividend Distributions; thus, S corporations with AE&P appear to have to file Form 5452. However, the form instructions state that an S corporation files the form only if it made nondividend distributions under Sec. 1368(c)(3) (covering nontaxable distributions made after the accumulated adjustments account (AAA) and AE&P have been distributed).

Evidently, Form 5452 must be filed by an S corporation only in the year it has no AAA or previously taxed income (PTI) balance, and makes distributions in excess of its AE&P balance. The form should be attached to the corporations tax return, Form 1120S, U.S. Income Tax Return for an S Corporation. Copies of Forms 1099-DIV, Dividends and Distributions, sent to the shareholders, should also be attached to the form if there are 12 or fewer shareholders.

The form must be accompanied by a schedule showing a year-by-year calculation of AE&P. An S corporations AE&P generally does not increase and is decreased only in limited situations.

Example
Before considering distributions, Micro, Inc., an S corporation, has a $93,000 AAA balance and a $15,000 AE&P balance. During the year, Micro distributed $150,000 to Mike.

Because the corporation distributed an amount in excess of the AAA and AE&P, it must file Form 5452. However, the instructions to the form say that an S corporation should file this form only with respect to distributions made under Section 1368(c)(3) (i.e., distributions made after the AAA and AE&P have been distributed). Evidently, distributions of AAA and PTI are not reported on the form. Micro should report a distribution of $57,000 ($150,000 $93,000) on Form 5452. Of the $57,000, $15,000 is a distribution of AE&P; $42,000 is a distribution from other than AE&P.

Micro will not be required to file Form 5452 in later years, because it has no AE&P and, thus, could not make a distribution under Sec. 1368(c)(3). The exhibit illustrates these facts.

Had Micro distributed an amount less than the combined AAA and AE&P balances, or if it did not have AE&P, evidently, it would not be required to file the form.

Practice note: As was stated, corporations with AE&P must report certain distributions on Form 5452. Because AE&P is not generated by an S corporation, only an S corporation that was formerly a C corporation (or had a C corporation with AE&P merged into it) must file Form 5452. However, if the S election terminates, distributions of AAA during the post-termination transition period (PTTP) are reported on Form 5452.

The form instructions also indicate that distributions of AAA during the PTTP must be reported on Form 5452.