CH. 1
NORMAL TAXES AND SURTAXES
95
(A) if the corporation uses the retail method of valuing inventories under section 472, by using such method, or (B) if subparagraph (A) does not apply, by using cost or market, whichever is lower. (c) LIABILITY IN EXCESS OF BASIS.—If—
(1) a corporation distributes property to a shareholder with respect to its stock, (2) such property is subject to a liability, or the shareholder assumes a liability of the corporation in connection with the distribution, and (3) the amount of such liability exceeds the adjusted basis (in the hands of the distributing corporation) of such property, then gain shall be recognized to the distributing corporation in an amount equal to such excess as if the property distributed had been sold at the time of the distribution. In the case of a distribution of property subject to a liability which is not assumed by the shareholder, the amount of gain to be recognized under the preceding sentence shall not exceed the excess, if any, of the fair market value of such property over its adjusted basis. SEC. 312. EFFECT ON EARNINGS AND PROFITS. (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, and (3) the adjusted basis of the other property, so distributed. (b) CERTAIN INVENTORY ASSETS.—
(1) IN GENERAL.^—On the distribution by a corporation, with respect to its stock, of inventory assets (as defined in paragraph (2)(A)) the fair market value of which exceeds the adjusted basis thereof, the earnings and profits of the corporation— (A) shall be increased by the amount of such excess; and (B) shall be decreased by whichever of the following is the lesser: (i) the fair market value of the inventory assets distributed, or (ii) the earnings and profits (as increased under subparagraph (A)). (2)
DEFINITIONS.—
(A) INVENTORY ASSETS.—For purposes of paragraph (1), the term "inventory assets" means— (i) 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; (ii) property held by the corporation primarily for sale to customers in the ordinary course of its trade or business; and (iii) unrealized receivables or fees, except receivables from sales or exchanges of assets other than assets described in this subparagraph. §312(b)(2)(A)(iii)
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