Paying dividends that exceed accumulated retained earnings

[Vityaba]

I have a C corp client with $200k in capital account and negative $150k in the accumulated retained earnings. The corp has accumulated some cash and the owner wants to pay himself dividends. A few questions here:

Can the corp pay dividends if the RE are in red?

Can the corp pay dividends if the capital and RE accounts combined are positive (up to $50k in this case)?

Can the corp pay dividends over $50k here?

I am asking strictly about IRS regs. The client is researching the state law aspect that regulates dividends 

Thank you

[ILLMAS]

Can the corp pay dividends if the RE are in red? Normally no, dividends are paid from accumulated profits.

Can the corp pay dividends if the capital and RE accounts combined are positive (up to $50k in this case)?  ^

Can the corp pay dividends over $50k here? ^

[Catherine]

Sounds like a return of capital to me.

[jklcpa]

You have to calculate earnings and profits of the year.  The C corp could pay out a distribution to be taxed as a dividend if it has sufficient current year earnings and profits.  E & P computation is different than computation of taxable income.  Code sec 316;  Reg sec 1.316-1.

From MTG -

Sources of Distributions. To be subject to income tax as a dividend, a distribution received by a shareholder must be paid out of earnings and profits of the distributing corporation. A dividend is any distribution made by a corporation to its shareholders out of its earnings and profits accumulated after February 28, 1913, or out of the earnings and profits of the tax year, computed as of the close of the tax year without diminution by reason of any distributions made during the tax year, without regard to the amount of the earnings and profits at the time of the distribution was made. (Code Sec 316; Reg. sec 1.316-1)

In order to determine the source of a distribution, consideration should be given first, to the earnings and profits of the tax year; second, to the earnings and profits accumulated since February 28, 1913, but only in the case when, and to the extent that, the distributions made during the tax year are not regarded as out of the earnings and profits of that year; third, to the earnings and profits accumulated before March 1, 1913, only after all of the earnings and profits of the tax year and all of the earnings and profits accumulated since February 28, 1913, have been distributed; and fourth, to sources other and earnings and profits only after the earnings and profits have been distributed (Reg. sec 1.316-2).

If the current year's earnings and profits are sufficient to cover all distributions made during the year, each distribution is a taxable dividend. If the year's cash distributions, however, exceed current earnings and profits, a part of the earnings and profits must be allocated proportionally to each distribution, on the basis of the following formula: distribution x (current earnings and profits / total distributions). The remaining portion of each distribution not covered by current earnings and profits is then treated as a taxable dividend to the extent of accumulated earnings and profits. If these are not sufficient to cover the remaining portion of any distribution, they are to be applied against each distribution in chronological order until exhausted.