4.7 - Entity/Owner Transactions

Question 1

Distributions from corporations to shareholders are taxable to shareholders when?

Answer 1

If classified as dividends

Question 2

A dividend is defined by the Internal Revenue Code as:

Answer 2

A distribution of property by a corporation out of it’s earnings and profits (E&P)

Question 3

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?

Answer 3

Taxable dividend
Taxable dividend
Non taxable
Taxable capital gain

Question 4

If both current and accumulated E&P are positive, distributions are what?

Answer 4

Taxable dividends to the extent of the current and accumulated E&P

Question 5

If both current and accumulated E&P are negative, distributions are what?

Answer 5

Not dividends

Question 6

If current E&P is positive and accumulated E&P is negative, distributions are what?

Answer 6

Taxable dividends to the extent of current E&P only

Question 7

If current E&P is negative and accumulated E&P is positive, distributions are what?

Answer 7

Current E&P and accumulated E&P are netted and the distributions are taxable dividends if the net amount is positive

Question 8

When dividends are in excess of E&P, how does the allocation apply to current E&P and accumulated E&P?

Answer 8

Current: allocated on a pro rata basis to each distribution
Accumulated: applied in chronological order beginning with the earliest distribution

Question 9

Examples of constructive dividends include:

Answer 9

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

Question 10

A distribution by a corporation of its own stock to its shareholders:

Answer 10

Stock dividend

Question 11

When are stock dividends taxable?

Answer 11

They are generally not taxable UNLESS the shareholder has a choice of receiving property or cash

Question 12

The value of the taxable stock dividend is:

Answer 12

The FMV on the distribution date

Question 13

The basis of a nontaxable stock dividend where old and new shares are identical is determined how?

Answer 13

By dividing the basis of the old stock by the number of old and new shares (total shares)

Question 14

What is the taxable amount of a dividends from a corporations earnings and profits for individuals and corporations?

Answer 14

Cash dividends: amount received
Property dividends: FMV of property received

Question 15

The general rule is that the payment of a dividend does not create a taxable event, but what is the exception?

Answer 15

If a corporation distributes appreciated property it is a taxable event to the corporation paying

Question 16

Occurs when a corporation buys back stock from its shareholders

Answer 16

Stock redemption

Question 17

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?

Answer 17

Gain or loss is recognized by the shareholder

The redemption is treated as a dividend to the extent of the corporations E&P

Question 18

If a proportional stock redemption, what happens?

Answer 18

Taxable divided income to the shareholder

Question 19

If a disproportional stock redemption, what happens?

Answer 19

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

Question 20

Disproportional means :

Answer 20

There has been a meaningful reduction in the shareholders ownership interest

Question 21

How are partial liquidation of corporations treated? How are complete buyout of shareholders treated?

Answer 21

Both are treated as an exchange of stock, not a dividend and creates a capital gain or loss

Question 22

If a corporation is liquidated, the transaction is subject to what?

Answer 22

Double taxation

Question 23

Corporation liquidation takes two general forms:

Answer 23

Either the corporation sells the assets and distributes the cash to the shareholders
OR
Distributed the assets to the shareholders

Question 24

When a corporation sells assets and distributes cash to shareholders, the result of the transaction is:

Answer 24

1. The corporation recognizes gain or loss on the sale of the asset
   And
2. Shareholders recognize gain or loss to the extent that cash exceeds adjusted basis of stock

Question 25

When a corporation distributes assets to is shareholders in liquidation, the result of the transaction is:

Answer 25

1. Corporation recognized gain or loss as if it sold the assets for FMV
   And
2. Shareholders recognize gain or loss to the extent that the FMV of assets received exceeds the adjusted basis of stock

Question 26

What are the 6 different types of tax free reorganizations?

Answer 26

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

Question 27

What is the event, income, basis, and tax attribute for both corporations and shareholders due to reorganizations?

Answer 27

For both:
Nontaxable event
No income
NBV basis
No change in tax attributes

Question 28

Why is a reorganization treated as a nontaxable event?

Answer 28

Because it results in the continuation of a business in a modified form

Question 29

Distinguish the difference between liquidation and reorganizations regarding business activity, corporate consequence, and shareholder consequence.

Answer 29

Liquidation: completely ceases ; taxable ; taxable
Reorganization: continues ; nontaxable ; nontaxable

Question 30

What is the qualification to receive the worthless stock: section 1244 stock loss deduction?

Answer 30

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

Question 31

What is the maximum ordinary loss deduction a shareholder can take when corporations stock is sold or becomes worthless?

Answer 31

$100,000 MFJ
$50,000 all other filers

Plus an additional 3,000 if loss is in excess of the maximum amount

Question 32

A non corporate shareholder who holds qualifies small business stock for more than 5 years may generally exclude what amount?

Answer 32

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)