9.4 - Corporate Tax Special Topics - Redemptions Flashcards
Redemptions - Overview
When is a stock considered to be redeemed?
When a corporation acquires its own stock from a shareholder in exchange for property, regardless of redeemed stock being canceled, retired, or held as treasury stock
Redemptions - Overview
How are shareholders required to treat amounts realized on a redemption not in liquidation?
Either as a distribution (a corporate dividend) or as a sale of stock redeemed.
Redemptions - Dividend or Sale Treatment
How are redemptions of stock by a corporation treated?
As dividends unless certain conditions are met
Redemptions - Dividend or Sale Treatment
Identify the (5) conditions that must be met for the exchange of stock to be treated as a sale and the gains or losses are capital gains and losses.
1 – Redemption is not essentially equivalent to a dividend;
2 – redemption is substantially disproportionate;
3 – distribution is in complete redemption of all of a shareholder’s stock;
4 – distribution is to a noncorporate shareholder in partial liquidation;
5 – distribution is rec’d by an estate
Redemptions - Realized Gain
How does a corporation recognize gain realized on a distribution?
As if the property distributed were sold at FMV to the distributee immediately prior to the distribution and even if stock is redeemed by the distribution
Redemptions - Loss Recognition
Complete the statement >>> No recognition of loss realized is allowed by the corporation, unless the redemption is…
In complete liquidation of the corporation or of stock held by an estate (to pay death taxes)
Redemptions - Recognition of Depreciated Property Distribution
How does a corporation recognize ordinary income on the distribution of depreciated property?
To the extent of depreciation or amount realized, whichever is less.
Redemptions - Shareholder Treatment
How is any unrecovered basis in the redeemed stock treated?
It is added to the shareholder’s basis in stock retained
Redemptions - Stock Reaquisition
Are the expenses incurred in connection with a reacquisition by a corporation of its own stock or the stock of a related person (50% relationship test) deductible?
No
Redemptions - Stock Reaquisition
Identify the exception to reacquisition expenses being deductible?
Any cost allocable to an indebtedness and amortized over the life of the indebtedness (e.g. financial advisory costs)
Redemptions - Sale Treatment
How do shareholders treat qualifying redemptions?
As if the shares redeemed were sold to a third party
Redemptions - Sale Treatment
What is the gain or loss for the sale treatment of redemptions?
Any spread between AB of the shares and the FMV of property rec’d
Redemptions - Sale Treatment
What is the nature of the stock in the shareholder’s hands dependent on?
The character of gain or loss of the stock
Redemptions - Sale Treatment
What is basis in distributed property?
FMV
Redemptions - Sale Treatment
When does the holding period start for redeemed property?
Starts the day after the redemption exchange
Redemptions - Sale Treatment
Identify the 5 requirements applicable to the sale treatment of redemptions.
1 – Terminate a shareholder’s interest;
2 – are substantially disproportionate between shareholders;
3 – are not essentially equivalent to a dividend;
4 – are rec’d by an estate;
5 – are from a shareholder, other than a corporation, in partial liquidation
Redemptions - Sale Treatment
How is treatment of a redemption as a sale determined for each shareholder?
Separately
Redemptions - Termination of Interest
True or False >>> Termination of a shareholder’s interest must be complete to qualify.
True
Redemptions - Termination of Interest
True or False >>> All the corporation’s stock owned by the shareholder must be redeemed in the exchange for the property?
True
Redemptions - Termination of Interest
Family attribution rules apply but may be waived if the following 3 requirements are met:
1 – the shareholder may not retain any interest, except as a creditor, in the corporation;
2 – the shareholder may not acquire any interest, except by bequest or inheritance, for 10 years;
3 – a written agreement must be filed with the IRS stating that the IRS will be notified if a prohibited interest is acquired.
Redemptions - Substantially Disproportionate
Define substantially disproportionate.
Means that the amount rec’d by shareholders is not in the same proportion as their stock holdings
Redemptions - Substantially Disproportionate
How is being substantially disproportionate determined?
By determining the shareholders’ applicable ownership percentages (including constructive ownership) both before and after redemption
Redemptions - Substantially Disproportionate
When is a redemption considered substantially disproportionate?
If immediately after the redemption, the shareholder owns less than 50% of the voting power of outstanding stock and less than 80% each of the interest in the voting stock owned before the redemption and common stock owned before the redemption
Redemptions - Equivalency to a Dividend
What does “not essentially equivalent to a dividend” mean?
There is a meaningful reduction in the shareholder’s proportionate interest in the corporation; reduction in voting power is generally required
Redemptions - Estate
True or False >>> an estate may treat a qualifying redemption (to pay death taxes) as a sale.
True
Redemptions - Estate
How must qualifying redeemed stock be valued when treated a sale?
Must be valued at more than 35% of the gross estate net of deductions allowed
Redemptions - Estate
What deductions are allowed when an estate has qualifying redemptions treated as sales?
- Administrative expenses;
- funeral expenses;
- claims against the estate (including death taxes), and
- unpaid mortgages
Redemptions - Partial Liquidations
Are partial liquidations a type of redemption?
Yes
True or False >>> the (redeemed) shareholder is treated as owning shares owned by certain related parties, e.g. family members (excluding siblings and grandparents).
True
