Chapter 18 corporate taxation nonliquidating distributions

Posted by / 26-Apr-2015 12:54

Chapter 18 corporate taxation nonliquidating distributions

Ral had paid ,000 for the land in 2003, and it had a fair market value of ,000 when the stockholder bought it. The portion of the distribution that is not a dividend reduces the shareholder’s tax basis in the corporation’s stock The portion of the distribution that is not a dividend and is in excess of the shareholder’s stock tax basis is treated as gain from sale or exchange of the stock Computing Earnings and Profits A “dividend” for tax purposes is: any distribution of property made by a corporation to its shareholders out of its earnings and profits (E&P) Two separate E&P concepts must be understood Current earnings and profits Accumulated earnings and profits Current E&P not distributed to shareholders is added to accumulated E&P at the beginning of the next taxable year Determining the Dividend Computing Earnings and Profits from Taxable Income Adjustments to taxable income fall into four broad categories: Income that is excluded from taxable income Deductions that do not require an economic outflow Deduction of expenses that require an economic outflow but are not deducted for computing taxable income Adjustment of timing for deductions or income because of accounting methods required for E&P computation Determining the Dividend Earnings and Profits 81. How much loss did Tour recognize on this distribution? Cher assumes a 0 mortgage attached to the property. Under §311(b)(2), Sunny Corporation reports a gain of 0 on the distribution (0 Liab - 0 AB). ,000 (+,500 gain - ,000 FMV + ,000 mortg.) = -,500 Stock Dividends A stock dividend increases the number of shares outstanding and thereby reduces the (value) price per share. 0 0 Stock Dividend Holding Period In January 2012, Joan Hill bought one share of Orban Corp. On March 1, 2012, Orban distributed one share of preferred stock for each share of common stock held. On March 1, 2012, Joan’s one share of common stock had a fair market value of 0, while the preferred stock had a fair market value of 0. The holding period for the preferred stock starts in a. Two unrelated individuals, Mark and David, each own 50% of the stock of Pike Corporation, which has accumulated earnings and profits of 0,000. If the redemption is treated as an exchange Gain is always recognized.

The amount of dividend income taxable to the stockholder in 2011 is a. At the beginning of the year, Cable, a C corporation, had accumulated earnings and profits of 0,000. The property’s FMV is deemed to be the amount of the liability assumed because it exceeds the property’s fair market value. On December 1, 2011, Gelt Corporation declared a dividend and distributed to its sole shareholder a parcel of land that was not an inventory asset. Most stock dividends take the form of a stock split, such as a 2-for-1 stock dividend. Because of his inactivity in the business in recent years, Mark has decided to retire from the business and wishes to sell his stock. Loss is recognized unless the shareholder is a related person to the corporation (§267) – Shareholder owns more than 50% of the stock’s value.

If these payments are unreasonable, then the unreasonable (excessive) portion may be treated as a constructive dividend and the payment is no longer deductible. $(57,000) Ordering of E&P Distributions Positive Current E&P and Positive Accumulated E&P Positive current E&P, negative accumulated E&P Negative current E&P, positive accumulated E&P Negative current E&P, negative accumulated E&P Determining the Dividend Taxable dividend 85. The following information pertains to Kent: Reed’s basis in Kent stock at January 1, 2011 0,000 Accumulated earnings and profits at January 1, 2011 125,000 Current earnings and profits for 2011 60,000 What was taxable as dividend income to Reed for 2011? ^ E&P should be apportioned on a daily basis, but for our purposes you can use months. Individuals prefer exchange treatment because of the ability to recover their stock basis. Stock ownership tests must be met for treatment as substantially disproportionate under Sec.

Constructive Dividends Examples of disguised (constructive) dividends – Unreasonable compensation Bargain sales of property to shareholders Shareholder use of corporate assets without an arm’s-length payment Loans from shareholders at excessive interest rates Corporate payments of the shareholder’s personal expenses Constructive Dividend 90. Determining the Dividend Tax Consequences to a Corporation Paying Noncash Property as a Dividend The corporation recognizes gains (but not losses) on the distribution of noncash property as a dividend Gain is recognized to the extent of fair market value in excess of tax basis in the property Liabilities If the property’s fair market value is less than liabilities assumed by the shareholder, the fair market value is deemed to be the liability Determining the Dividend Loss Recognition 87.

Ral had paid ,000 for the land in 2003, and it had a fair market value of ,000 when the stockholder bought it. The portion of the distribution that is not a dividend reduces the shareholder’s tax basis in the corporation’s stock The portion of the distribution that is not a dividend and is in excess of the shareholder’s stock tax basis is treated as gain from sale or exchange of the stock Computing Earnings and Profits A “dividend” for tax purposes is: any distribution of property made by a corporation to its shareholders out of its earnings and profits (E&P) Two separate E&P concepts must be understood Current earnings and profits Accumulated earnings and profits Current E&P not distributed to shareholders is added to accumulated E&P at the beginning of the next taxable year Determining the Dividend Computing Earnings and Profits from Taxable Income Adjustments to taxable income fall into four broad categories: Income that is excluded from taxable income Deductions that do not require an economic outflow Deduction of expenses that require an economic outflow but are not deducted for computing taxable income Adjustment of timing for deductions or income because of accounting methods required for E&P computation Determining the Dividend Earnings and Profits 81. How much loss did Tour recognize on this distribution? Cher assumes a 0 mortgage attached to the property. Under §311(b)(2), Sunny Corporation reports a gain of 0 on the distribution (0 Liab - 0 AB). ,000 (+,500 gain - ,000 FMV + ,000 mortg.) = -

Ral had paid $40,000 for the land in 2003, and it had a fair market value of $80,000 when the stockholder bought it. The portion of the distribution that is not a dividend reduces the shareholder’s tax basis in the corporation’s stock The portion of the distribution that is not a dividend and is in excess of the shareholder’s stock tax basis is treated as gain from sale or exchange of the stock Computing Earnings and Profits A “dividend” for tax purposes is: any distribution of property made by a corporation to its shareholders out of its earnings and profits (E&P) Two separate E&P concepts must be understood Current earnings and profits Accumulated earnings and profits Current E&P not distributed to shareholders is added to accumulated E&P at the beginning of the next taxable year Determining the Dividend Computing Earnings and Profits from Taxable Income Adjustments to taxable income fall into four broad categories: Income that is excluded from taxable income Deductions that do not require an economic outflow Deduction of expenses that require an economic outflow but are not deducted for computing taxable income Adjustment of timing for deductions or income because of accounting methods required for E&P computation Determining the Dividend Earnings and Profits 81. How much loss did Tour recognize on this distribution? Cher assumes a $300 mortgage attached to the property. Under §311(b)(2), Sunny Corporation reports a gain of $200 on the distribution ($300 Liab - $100 AB). $14,000 (+$7,500 gain - $14,000 FMV + $5,000 mortg.) = -$1,500 Stock Dividends A stock dividend increases the number of shares outstanding and thereby reduces the (value) price per share. $150 $150 Stock Dividend Holding Period In January 2012, Joan Hill bought one share of Orban Corp. On March 1, 2012, Orban distributed one share of preferred stock for each share of common stock held. On March 1, 2012, Joan’s one share of common stock had a fair market value of $450, while the preferred stock had a fair market value of $150. The holding period for the preferred stock starts in a. Two unrelated individuals, Mark and David, each own 50% of the stock of Pike Corporation, which has accumulated earnings and profits of $250,000. If the redemption is treated as an exchange Gain is always recognized.The amount of dividend income taxable to the stockholder in 2011 is a. At the beginning of the year, Cable, a C corporation, had accumulated earnings and profits of $100,000. The property’s FMV is deemed to be the amount of the liability assumed because it exceeds the property’s fair market value. On December 1, 2011, Gelt Corporation declared a dividend and distributed to its sole shareholder a parcel of land that was not an inventory asset. Most stock dividends take the form of a stock split, such as a 2-for-1 stock dividend. Because of his inactivity in the business in recent years, Mark has decided to retire from the business and wishes to sell his stock. Loss is recognized unless the shareholder is a related person to the corporation (§267) – Shareholder owns more than 50% of the stock’s value.

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Ral had paid $40,000 for the land in 2003, and it had a fair market value of $80,000 when the stockholder bought it. The portion of the distribution that is not a dividend reduces the shareholder’s tax basis in the corporation’s stock The portion of the distribution that is not a dividend and is in excess of the shareholder’s stock tax basis is treated as gain from sale or exchange of the stock Computing Earnings and Profits A “dividend” for tax purposes is: any distribution of property made by a corporation to its shareholders out of its earnings and profits (E&P) Two separate E&P concepts must be understood Current earnings and profits Accumulated earnings and profits Current E&P not distributed to shareholders is added to accumulated E&P at the beginning of the next taxable year Determining the Dividend Computing Earnings and Profits from Taxable Income Adjustments to taxable income fall into four broad categories: Income that is excluded from taxable income Deductions that do not require an economic outflow Deduction of expenses that require an economic outflow but are not deducted for computing taxable income Adjustment of timing for deductions or income because of accounting methods required for E&P computation Determining the Dividend Earnings and Profits 81. How much loss did Tour recognize on this distribution? Cher assumes a $300 mortgage attached to the property. Under §311(b)(2), Sunny Corporation reports a gain of $200 on the distribution ($300 Liab - $100 AB). $14,000 (+$7,500 gain - $14,000 FMV + $5,000 mortg.) = -$1,500 Stock Dividends A stock dividend increases the number of shares outstanding and thereby reduces the (value) price per share. $150 $150 Stock Dividend Holding Period In January 2012, Joan Hill bought one share of Orban Corp. On March 1, 2012, Orban distributed one share of preferred stock for each share of common stock held. On March 1, 2012, Joan’s one share of common stock had a fair market value of $450, while the preferred stock had a fair market value of $150. The holding period for the preferred stock starts in a. Two unrelated individuals, Mark and David, each own 50% of the stock of Pike Corporation, which has accumulated earnings and profits of $250,000. If the redemption is treated as an exchange Gain is always recognized.

The amount of dividend income taxable to the stockholder in 2011 is a. At the beginning of the year, Cable, a C corporation, had accumulated earnings and profits of $100,000. The property’s FMV is deemed to be the amount of the liability assumed because it exceeds the property’s fair market value. On December 1, 2011, Gelt Corporation declared a dividend and distributed to its sole shareholder a parcel of land that was not an inventory asset. Most stock dividends take the form of a stock split, such as a 2-for-1 stock dividend. Because of his inactivity in the business in recent years, Mark has decided to retire from the business and wishes to sell his stock. Loss is recognized unless the shareholder is a related person to the corporation (§267) – Shareholder owns more than 50% of the stock’s value.

If these payments are unreasonable, then the unreasonable (excessive) portion may be treated as a constructive dividend and the payment is no longer deductible. $(57,000) Ordering of E&P Distributions Positive Current E&P and Positive Accumulated E&P Positive current E&P, negative accumulated E&P Negative current E&P, positive accumulated E&P Negative current E&P, negative accumulated E&P Determining the Dividend Taxable dividend 85. The following information pertains to Kent: Reed’s basis in Kent stock at January 1, 2011 $500,000 Accumulated earnings and profits at January 1, 2011 125,000 Current earnings and profits for 2011 60,000 What was taxable as dividend income to Reed for 2011? ^ E&P should be apportioned on a daily basis, but for our purposes you can use months. Individuals prefer exchange treatment because of the ability to recover their stock basis. Stock ownership tests must be met for treatment as substantially disproportionate under Sec.

Constructive Dividends Examples of disguised (constructive) dividends – Unreasonable compensation Bargain sales of property to shareholders Shareholder use of corporate assets without an arm’s-length payment Loans from shareholders at excessive interest rates Corporate payments of the shareholder’s personal expenses Constructive Dividend 90. Determining the Dividend Tax Consequences to a Corporation Paying Noncash Property as a Dividend The corporation recognizes gains (but not losses) on the distribution of noncash property as a dividend Gain is recognized to the extent of fair market value in excess of tax basis in the property Liabilities If the property’s fair market value is less than liabilities assumed by the shareholder, the fair market value is deemed to be the liability Determining the Dividend Loss Recognition 87. $0 Example 1 Cher Holder receives a property distribution from Sunny Corporation with a fair value of $200. Corporate shareholders prefer dividend treatment because of the dividends received deduction. 302(b)(2): The shareholder owns less than 50 percent of the voting power immediately after the exchange The shareholder’s percentage of voting stock and aggregate value after the redemption is less than 80 percent of the percentage before the redemption In computing the percentage ownership tests, constructive ownership rules under Sec.

On June 30, 2011, Ral Corporation had earnings and profits of $100,000. At the beginning of the year, Westwind, a C corporation, had a deficit of $45,000 in accumulated earnings and profits. Tour Corp., which had earnings and profits of $400,000, made a nonliquidating distribution of property to its shareholders in 2012. Cher assumes a $100 mortgage attached to the property. Under §311(b)(1), Sunny Corporation reports a gain of $100 on the distribution ($200 FMV - $100 AB). Three types of redemptions are treated as exchanges by determining the effect of the redemption on the redeemed shareholder: Redemptions that are Substantially Disproportionate are treated as sales. 318 must be used: Family attribution (spouse, children, grandchildren, parents) Attribution from entities to owners or beneficiaries Attribution from owners or beneficiaries to entities Option attribution Stock Redemptions Example A shareholder owns 60 of the corporation’s 100 shares of voting common stock before the redemption.

,500 Stock Dividends A stock dividend increases the number of shares outstanding and thereby reduces the (value) price per share. 0 0 Stock Dividend Holding Period In January 2012, Joan Hill bought one share of Orban Corp. On March 1, 2012, Orban distributed one share of preferred stock for each share of common stock held. On March 1, 2012, Joan’s one share of common stock had a fair market value of 0, while the preferred stock had a fair market value of 0. The holding period for the preferred stock starts in a. Two unrelated individuals, Mark and David, each own 50% of the stock of Pike Corporation, which has accumulated earnings and profits of 0,000. If the redemption is treated as an exchange Gain is always recognized.The amount of dividend income taxable to the stockholder in 2011 is a. At the beginning of the year, Cable, a C corporation, had accumulated earnings and profits of 0,000. The property’s FMV is deemed to be the amount of the liability assumed because it exceeds the property’s fair market value. On December 1, 2011, Gelt Corporation declared a dividend and distributed to its sole shareholder a parcel of land that was not an inventory asset. Most stock dividends take the form of a stock split, such as a 2-for-1 stock dividend. Because of his inactivity in the business in recent years, Mark has decided to retire from the business and wishes to sell his stock. Loss is recognized unless the shareholder is a related person to the corporation (§267) – Shareholder owns more than 50% of the stock’s value.

Example 1 Cher Holder receives a property distribution from Sunny Corporation with a fair value of 0. Corporate shareholders prefer dividend treatment because of the dividends received deduction. 302(b)(2): The shareholder owns less than 50 percent of the voting power immediately after the exchange The shareholder’s percentage of voting stock and aggregate value after the redemption is less than 80 percent of the percentage before the redemption In computing the percentage ownership tests, constructive ownership rules under Sec.

On June 30, 2011, Ral Corporation had earnings and profits of 0,000. At the beginning of the year, Westwind, a C corporation, had a deficit of ,000 in accumulated earnings and profits. Tour Corp., which had earnings and profits of 0,000, made a nonliquidating distribution of property to its shareholders in 2012. Cher assumes a 0 mortgage attached to the property. Under §311(b)(1), Sunny Corporation reports a gain of 0 on the distribution (0 FMV - 0 AB). Three types of redemptions are treated as exchanges by determining the effect of the redemption on the redeemed shareholder: Redemptions that are Substantially Disproportionate are treated as sales. 318 must be used: Family attribution (spouse, children, grandchildren, parents) Attribution from entities to owners or beneficiaries Attribution from owners or beneficiaries to entities Option attribution Stock Redemptions Example A shareholder owns 60 of the corporation’s 100 shares of voting common stock before the redemption.

Distributions may result in a tax-free return of capital. Framework for Property Distributions Payments to shareholders are deductible by the corporation if the payment relates to services provided by the shareholder (such as salary, bonus, interest, or rent). In 2011, Kent made a nonliquidating distribution of property with an adjusted basis of 0,000 and a fair market value of 0,000 to Reed, its sole shareholder. AE&P as of July 1 = M  ½(M) = 0,000^ 0,000 is a treated as a dividend to the extent of the AE&P that is available to pay out on the date of distribution. A redemption may result in a dividend to the shareholder or may be treated as a sale or exchange of the redeemed shares if certain requirements are met.If the mortgage on the land was assumed by the sole shareholder, by how much should the dividend distribution reduce Gelt’s earnings and profits? If Mark’s adjusted basis for his stock at date of redemption is 0,000, what will be the tax effect of the redemption to Mark? “Family” attribution now includes the taxpayer’s brothers and sisters, spouse, ancestors, and lineal descendents. The basis of the property received is fair market value. Please select the category that most closely reflects your concern about the presentation, so that we can review it and determine whether it violates our Terms of Use or isn't appropriate for all viewers. On January 1, 2011, Locke Corp., an accrual-basis, calendar-year C corporation, had ,000 in accumulated earnings and profits. The entire distribution is deemed to come from current E&P and is a dividend to the shareholders.Learning Objectives Explain the basic tax law framework that applies to property distributions from a corporation to a shareholder Compute a corporation’s earnings and profits and calculate the dividend amount received by a shareholder Identify situations in which a corporation may be deemed to have paid a “constructive dividend” to a shareholder Comprehend the basic tax rules that apply to stock dividends Learning Objectives Comprehend the different tax consequences that can arise from stock redemptions Contrast a partial liquidation with other types of stock redemptions and describe the difference in tax consequences to the shareholders Framework for Property Distributions Corporations cannot deduct dividend distributions and this creates the “double taxation” of the corporation’s income. For 2011, Locke had current earnings and profits of ,000 and made two ,000 cash distributions to its shareholders, one in April and one in September of 2011. This is because CE&P is measured as of the close of the taxable year without regard to what it was on the actual date of distribution.

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