C CORP Contributions & Distributions Flashcards
Non-Liquidating Distribution of Property
Shareholder - On a non-liquidating distribution of property, the shareholder treats the property (received at FMV) as if it were cash and treats it as dividend income up to the amount of Current and accumulated E&P. Anything over the accumulated E&P is treated as a return of capital until the shareholder’s basis reaches zero. Anything over the Shareholders basis is a considered a capital gain.
The basis of the property received is always the FMV of the property at time of distribution (REGARDLESS if mortgages are attached)
The Gain recognized by the shareholder is the FMV of property received less any mortgages attached. Then this gain is carried out like a normal distribution. IE Dividend income for AE&P and CE&P, Return of Capital up to basis, and then a Capital Gain.
C Corp - The C Corp recognizes a gain equal to the amount that the property has appreciated. The Corporation considers the property distributed at FMV and then treats the distribution as if it were a cash distribution.
Liquidating Distribution
80% or More - No gain or loss is recognized by either the parent corporation (Forrest) or the subsidiary corporation when the parent, who owns at least 80% of the stock, liquidates its subsidiary. The parent assumes the basis of the subsidiary’s assets as well as unused NOL carryover, capital loss carryover or charitable contribution carryover.
Less Than 80% - When a corporation makes a liquidating distribution, it is generally subject to double taxation i.e. both the corporation and the shareholders recognize gain or loss. This system of double taxation can be explained here. Depending on how a corporation liquidates its assets, i.e., sell and distribute cash to shareholders or distribute asset directly to shareholders at FMV, the corporation recognizes gain or loss which is equal to the difference between the property basis and sale price/FMV. Likewise, the amount of gain or loss that the shareholder must recognize is equal to sum of Cash and Fair Value of Property received less stockholder basis.
If a company hold inventory the gain or loss is treated as ordinary as it is not a capital asset.*
-Same rules apply for partial liquidation-
Shareholder Contribution of Property
On a Contribution of property, no gain or loss is recognized if the Shareholder has immediate control after the transfer when receiving stock in return. If the shareholders do not have more than 80% at the time of the exchange, the shareholder recognizes a gain on the transaction. One exception to this rule is when cash or other property (boot) is received by the shareholder in Addition to the corporation’s stock. In such an event, the shareholder would recognize gain up to the amount of boot (cash or FMV of other property) received.
If less than 80% its a taxable event on the shareholder.
The C Corp - If Shareholder(s) have 80% or more, than the basis in the property will be carried over. If boot is involved, its carry over basis of property plus the FMV of the boot.
Sale between a Shareholder and C Corp
Sales between Corp and Shareholder - Losses are disallowed on sales or exchanges of property between related parties and this includes a majority shareholder and the corporation. Any gain later realized by the related transferee on the subsequent sale of the property is not recognized to the extent of the transferor’s disallowed loss.
Just like individuals - On a sale of property between related parties, the loss is deferred until the second party sells the item and they can take the loss up to the amount of gain realized.
How does a distribution of property affect a corporations E&P?
The corporations E&P is increased by the gain recognized on the distribution of the property.
The gain is the difference of FMV from Basis and the E&P increases by the same amount as the gain.
Capital Losses
Can be carried back 3 years and forward 5 years. Do not offset ordinary income. Only capital gains.
1231 gains and losses offset each other first and then apply to whichever category they are classified. IE 1245 losses offset gains and then are classified as an ordinary loss.
Losses do not retain character as everything is taxed at the flat 21%
How does the distribution of property affect the C Corp AE&P?
Because a gain is recognized prior to distribution, the gain is added to AE&P. This results in a higher amount of “dividend” prior to the return of capital or capital gain recognized by the shareholder.
Sharholder Basis in property Received
Ignore Mortgages
Use FMV only for property received. NO attached liabilities and DO NOT use the corporation’s basis in the property as it only applies to the corporation.
