4.7 - Entity/Owner Transactions Flashcards
Distributions from corporations to shareholders are taxable to shareholders when?
If classified as dividends
A dividend is defined by the Internal Revenue Code as:
A distribution of property by a corporation out of it’s earnings and profits (E&P)
If the distribution of property comes from current E&P, what is it considered?
If the distribution of property comes from accumulated E&P, what is it considered?
If the distribution of property comes from return of capital to the extent of stock basis, what is it considered?
If the distribution of property comes from capital gain distribution, what is it considered?
Taxable dividend
Taxable dividend
Non taxable
Taxable capital gain
If both current and accumulated E&P are positive, distributions are what?
Taxable dividends to the extent of the current and accumulated E&P
If both current and accumulated E&P are negative, distributions are what?
Not dividends
If current E&P is positive and accumulated E&P is negative, distributions are what?
Taxable dividends to the extent of current E&P only
If current E&P is negative and accumulated E&P is positive, distributions are what?
Current E&P and accumulated E&P are netted and the distributions are taxable dividends if the net amount is positive
When dividends are in excess of E&P, how does the allocation apply to current E&P and accumulated E&P?
Current: allocated on a pro rata basis to each distribution
Accumulated: applied in chronological order beginning with the earliest distribution
Examples of constructive dividends include:
Excessive salaries paid to shareholder employees
Excessive rents and royalties
Loans to shareholders where there is no intent to repay
Sale of assets below fair market value
A distribution by a corporation of its own stock to its shareholders:
Stock dividend
When are stock dividends taxable?
They are generally not taxable UNLESS the shareholder has a choice of receiving property or cash
The value of the taxable stock dividend is:
The FMV on the distribution date
The basis of a nontaxable stock dividend where old and new shares are identical is determined how?
By dividing the basis of the old stock by the number of old and new shares (total shares)
What is the taxable amount of a dividends from a corporations earnings and profits for individuals and corporations?
Cash dividends: amount received
Property dividends: FMV of property received
The general rule is that the payment of a dividend does not create a taxable event, but what is the exception?
If a corporation distributes appreciated property it is a taxable event to the corporation paying
Occurs when a corporation buys back stock from its shareholders
Stock redemption
If the stock redemption qualifies for sale or exchange treatment, what happens? If the stock redemption does not qualify for a sale or exchange treatment, what happens?
Gain or loss is recognized by the shareholder
The redemption is treated as a dividend to the extent of the corporations E&P
If a proportional stock redemption, what happens?
Taxable divided income to the shareholder
If a disproportional stock redemption, what happens?
Treated as a taxable gain/loss to shareholder if after the redemption there is less than 50% ownership and less than 80% ownership before the redemption
Disproportional means :
There has been a meaningful reduction in the shareholders ownership interest
How are partial liquidation of corporations treated? How are complete buyout of shareholders treated?
Both are treated as an exchange of stock, not a dividend and creates a capital gain or loss
If a corporation is liquidated, the transaction is subject to what?
Double taxation
Corporation liquidation takes two general forms:
Either the corporation sells the assets and distributes the cash to the shareholders
OR
Distributed the assets to the shareholders
When a corporation sells assets and distributes cash to shareholders, the result of the transaction is:
- The corporation recognizes gain or loss on the sale of the asset
And - Shareholders recognize gain or loss to the extent that cash exceeds adjusted basis of stock
When a corporation distributes assets to is shareholders in liquidation, the result of the transaction is:
- Corporation recognized gain or loss as if it sold the assets for FMV
And - Shareholders recognize gain or loss to the extent that the FMV of assets received exceeds the adjusted basis of stock
What are the 6 different types of tax free reorganizations?
Type A - merger or consolidation
Type B - acquisition by one corp. of another corp.’s stock (stock for stock)
Type C - acquisition by one corp. of another corp.’s assets (stock for assets)
Type D - dividing of the corporation into separate operating corporations
Type E - recapitalizations
Type F - a change in identify, form, or place of organization
What is the event, income, basis, and tax attribute for both corporations and shareholders due to reorganizations?
For both:
Nontaxable event
No income
NBV basis
No change in tax attributes
Why is a reorganization treated as a nontaxable event?
Because it results in the continuation of a business in a modified form
Distinguish the difference between liquidation and reorganizations regarding business activity, corporate consequence, and shareholder consequence.
Liquidation: completely ceases ; taxable ; taxable
Reorganization: continues ; nontaxable ; nontaxable
What is the qualification to receive the worthless stock: section 1244 stock loss deduction?
Cash or property paid to the corporation in exchange for its first $1,000,000 of capital stock
The stock must have been issued to an individual stockholder for money or other property, but not stock or securities or services rendered
What is the maximum ordinary loss deduction a shareholder can take when corporations stock is sold or becomes worthless?
$100,000 MFJ
$50,000 all other filers
Plus an additional 3,000 if loss is in excess of the maximum amount
A non corporate shareholder who holds qualifies small business stock for more than 5 years may generally exclude what amount?
100% of the gain on the sale or exchange of the stock
Maximum exclusions are limited to 100% of the greater of:
10 times the taxpayers basis in the stock
OR
$10 million ($5 million if MFS)
