Ch 19 Flashcards
Chapter definitions for South-Western Federal Taxation 2015: Comprehensive, 38th Edition
Accumulated earnings and profits
Net undistributed tax-basis earnings of a corporation aggregated from March 1, 1913, to the end of the prior tax year. Used to determine the amount of dividend income associated with a distribution to shareholders. See also current earnings and profits and earnings and profits. ? 316 and Reg. ? 1.3162.
Attribution
Under certain circumstances, the tax law applies attribution rules to assign to one taxpayer the ownership interest of another taxpayer. If, for example, the stock of Tree Corporation is held 60 percent by Mary and 40 percent by Sam, Mary may be deemed to own 100 percent of Tree if Sam is her child. In that case, the stock owned by Sam is attributed to Mary. Stated differently, Mary has a 60 percent direct and a 40 percent indirect interest in Tree. It can also be said that Mary is the constructive owner of Sam’s interest.
Complete termination redemption
Sale or exchange treatment is available relative to this type of stock redemption. The shareholder must retire all of his or her outstanding shares in the corporation (ignoring family attribution rules) and cannot hold an interest, other than that of a creditor, for the 10 years following the redemption. ? 302(b)(3).
Constructive dividend
A taxable benefit derived by a shareholder from his or her corporation that is not actually initiated by the board of directors as a dividend. Examples include unreasonable compensation, excessive rent payments, bargain purchases of corporate property, and shareholder use of corporate property. Constructive dividends generally are found in closely held corporations. See also bargain sale or purchase.
Current earnings and profits
Net tax-basis earnings of a corporation aggregated during the current tax year. A corporate distribution is deemed to be first from the entity’s current earnings and profits and then from accumulated earnings and profits. Shareholders recognize dividend income to the extent of the earnings and profits of the corporation. A dividend results to the extent of current earnings and profits, even if there is a larger negative balance in accumulated earnings and profits. ? 316 and Reg. ? 1.3162.
Disproportionate redemption
Sale or exchange treatment is available relative to this type of stock redemption. After the exchange, the shareholder owns less than 80 percent of his or her pre-redemption interest in the corporation and only a minority interest in the entity. ? 302(b)(2).
Earnings and profits (E & P)
Measures the economic capacity of a corporation to make a distribution to shareholders that is not a return of capital. Such a distribution results in dividend income to the shareholders to the extent of the corporation’s current and accumulated earnings and profits.
Meaningful reduction test
A decrease in the shareholder’s voting control. Used to determine whether a stock redemption qualifies for sale or exchange treatment.
Not essentially equivalent redemption
Sale or exchange treatment is given to this type of stock redemption. Although various safe-harbor tests are failed, the nature of the redemption is such that dividend treatment is avoided, because it represents a meaningful reduction in the shareholder’s interest in the corporation. ? 302(b)(1).
Property dividend
A dividend consisting of in-kind (noncash) assets of the payor, measured by the fair market value of the property on the date of distribution. Distribution of in-kind property causes the distributing C or S corporation to recognize any underlying realized gain, but not loss.
Qualified dividends
Distributions made by domestic (and certain non-U.S.) corporations to noncorporate shareholders that are subject to tax at the same rates as those applicable to net long-term capital gains (i.e., 0 percent, 15 percent, or 20 percent). The 20 percent rate applies to certain high-income taxpayers (i.e., whose tax bracket is 39.6 percent). The dividend must be paid out of earnings and profits, and the shareholders must meet certain holding period requirements as to the stock. ?? 1(h) (1) and (11).
Redemption to pay death taxes
Sale or exchange treatment is available relative to this type of stock redemption, to the extent of the proceeds up to the total amount paid by the estate or heir for estate/inheritance taxes and administration expenses. The stock value must exceed 35 percent of the value of the decedent’s adjusted gross estate. In meeting this test, one can combine shareholdings in corporations where the decedent held at least 20 percent of the outstanding shares.
Stock dividend
A dividend consisting of stock of the payor. Not taxable if a pro rata distribution of stock or stock rights on common stock. However, some stock dividends are taxable. ? 305.
Stock redemption
A corporation buys back its own stock from a specified shareholder. Typically, the corporation recognizes any realized gain on the noncash assets that it uses to effect a redemption, and the shareholder obtains a capital gain or loss upon receipt of the purchase price.
Stock rights
Assets that convey to the holder the power to purchase corporate stock at a specified price, often for a limited period of time. Stock rights received may be taxed as a distribution of earnings and profits. After the right is exercised, the basis of the acquired share includes the investor’s purchase price or gross income, if any, to obtain the right. Disposition of the right also can be a taxable event.
