Transcript Corporate Nonliquidating Distributions

Chapter 15
Corporate Nonliquidating
Distributions
©2008 CCH. All Rights Reserved.
4025 W. Peterson Ave.
Chicago, IL 60646-6085
1 800 248 3248
www.CCHGroup.com
Dividend Distsributions



Dividend to the extent of the
corporation’s current and
accumulated E&P.
Dividends in excess of E&P are
returns of capital – reduce
shareholder basis.
Once basis=0, then gain on sale.
CCH Federal Taxation Comprehensive Topics
2 of 59
Earnings and Profits



E&P is computed annually
Not defined by IRC, but adjustments
to and from taxable income. (pg 15-4
through 15-5)
Distributions from current E&P first,
then from accumulated E&P
CCH Federal Taxation Comprehensive Topics
3 of 59
E&P (cont’d)



Distributions<current E&P, then dividends, even
if accum E&P<0
Distributions>current E&P, but not greater then
sum ofcurrent and accum, then:
Current E&P/Total dist = % dist
If distribution is greater than E&P available, then
return of capital based on %.
CCH Federal Taxation Comprehensive Topics
4 of 59
Property Distributions – S/H




FMV at date of distribution
If liability attached, then FMV-liability.
Dividend income to extent of E&P.
S/H basis in the property is FMV, and holding
period is as of date of distribution.
CCH Federal Taxation Comprehensive Topics
5 of 59
Property Distributions – Corp




Corporation recognizes gain equal to FMV-AB
Losses are not recognized.
No gain or loss if distributes its own stocks.
If property encumbered by a liability, then for
gain calculations, FMV = greater of FMV or
liability.
CCH Federal Taxation Comprehensive Topics
6 of 59
Property Distributions – Corp (cont’d)



E&P is reduced by AB.
If appreciated property is distributed, then
E&P is increased by appreciation, then
decreased by FMV.
Decrease in E&P by the property’s AB or
FMV, is reduced by liability on property.
CCH Federal Taxation Comprehensive Topics
7 of 59
Constructive dividends







Unreasonable compensation
Corporate payment of shareholder responsibilities
Shareholder loans
Corporate loans
Free personal use of corporate property
Bargain sales/rentals to shareholders
Premium sales/rentals to the corporation
CCH Federal Taxation Comprehensive Topics
8 of 59
Stock Dividends – Non Taxable



Proportionate stock sales are not taxable.
Shares in NT dividend take on holding period
of original shares.
E&P is not reduced.
CCH Federal Taxation Comprehensive Topics
9 of 59
Stock Dividends –Taxable





Taxable if there is an option of stock or
property
Disproportionate distributions
Some receive common/some preferred
Distributions on preferred stock
Distribution of convertible preferred stock
CCH Federal Taxation Comprehensive Topics
10 of 59
Stock Dividends –Taxable




S/H dividends (to extent of E&P) is stock’s
FMV.
Basis of stock is FMV on distribution date.
Holding period as of distribution date.
E&P is reduced by FMV of stock.
CCH Federal Taxation Comprehensive Topics
11 of 59
Stock Redemptions



Sale or exchange treatment if Section 302/303
requirements met (page 15-22).
Sale or exchange is preferential b/c return of
capital and potential capital gain, not a
dividend.
Constructive ownership – attribution (family
members, partners, corporations with >=50%
ownership
CCH Federal Taxation Comprehensive Topics
12 of 59
Stock redemptions


302(b)(1) – exchange treatment id redemption is
not essentially a dividend.
Vague test – BUT interpreted to mean there must
be a meaningful reduction in s/h interest. (i.e., a
loss of controlling interest).
CCH Federal Taxation Comprehensive Topics
13 of 59
Stock redemptions

302(b)(2) – 3 mechanical tests if met, assure
exchange treatment.
 After redemption, s/h owns less than 50%
 S/H proportionate interest must be 80% less
than before redemption
CCH Federal Taxation Comprehensive Topics
14 of 59
Stock redemptions



302(b)(3) – Complete termination of s/h interest
Family attribution can be waived if s/h signs
agreement to sever all ties for 10 years.
S/H can be a creditor and can be an owner again if
stock is inherited.
CCH Federal Taxation Comprehensive Topics
15 of 59
Stock redemptions




302(b)(4) – determined at corporate level, not s/h.
If distribution is considered a partial liquidation,
then it will be exchange treatment.
Corporation must cease to conduct its trade or
business, or have contracted the business.
Conduct a new trade or business.
Must have been active 5 years before the
distribution
CCH Federal Taxation Comprehensive Topics
16 of 59
Stock redemptions


303 – Redemptions of stock to pay a s/h’s federal
and state death taxes, funeral and administrative
expenses receive gain treatment.
Some criteria must be met.
CCH Federal Taxation Comprehensive Topics
17 of 59
Tax Consequences - Corporation

Costs incurred by a corp in redeeming its stock
must be capitalized and not amortized.
CCH Federal Taxation Comprehensive Topics
18 of 59