Ch 4 Part 2 Flashcards
Attribution from entities 2
Stock owned by or for partnership is considered to be owned
Proportionately by partners
Stock owned by or for an estate is considered to be owned
Proportionately by the beneficiaries
Family Attribution section 318, two things
Individual is considered to own constructively all stock owned by
Or for his or her spouse, children, grandchildren and parents
An individual isn’t considered to own stock owned by his brothers,
Sisters or grandparents
Attribution to entities 4
1 All stock owned by or for a partnership is considered to be
Constructively owned by the partnership
2 All stock owned by or for beneficiary of estate or trust is
considered to be constructively owned by estate or trust
3 all stock owned by or for shareholder who owns (directly
Or indirectly) 50% more C corporation’s stock is considered
Constructively owned by corporation
4 stock ownership attributed to partnership, estate, trust or
Corporation from a partner, beneficiary or shareholder is not
Reattributed to another partner, beneficiary or shareholder
Option attribution
Person who holds an option to purchase stock is considered
To own the underlying stock
A redemption is substantially disproportionate with respect to a shareholder if all 3 conditions are met after redemption:
1 shareholder owns less than 50% of total Combined voting
power of all classes of voting stock
2 shareholder owns less than 80% of his or her percentage
Ownership of voting stock that they owned before the redemption
3 shareholder owns less than 80% common stock that they owned
Before the redemption
What 3 conditions must the shareholder meet to have the family attribution rules waived
1 after redemption shareholder must not retain any interest
In corp. except as creditor (restriction includes interest as employee)
2 shareholder must not acquire any such interest (other than
By bequest or inheritance) for at least 10 years after date of
redemption
3 shareholder must file written agreement with IRS that he or
She will notify IRS upon acquiring any prohibited interest
Redemption of a non corporate shareholder’s stock qualifies for sale treatment if…
The redemption is in partial liquidation of the corporation
Partial liquidation
Occurs when corporation discontinues one line of business,
Distributes assets used in that business to its shareholders
And continues at least one other line of business
When must a partial distribution be made to get sales tax treatment
Distribution Must be made within the tax year in which the
Plan of partial liquidation has been adopted
or within succeeding tax year
Safe Harbor Rule Sec. 302 e: distribution qualifies as partial distribution if: 4 things
1 distribution is attributable to distributing corp.’s ceasing
To conduct qualified trade or business or consists of assets
Of qualified trade or business
2 immediately after distribution, corp. is engaged in at least 1
Qualified trade/business
3 has been actively conducted throughout the 5-year period
Ending on date of redemption
4 was not acquired by corp. within such 5 yr. Period in partially
Or wholly taxable situation
Corporation shareholders: tax treatment of partial liquidation to them
Corporation must treat partial liquidation as a dividend, but
Receives the dividends received deduction
Any basis on redeemed shares from the partial liquidation is
added to the Basis of the corporations remaining shares
Redemption of stock that was included in a decedent’s gross
Estate is usually treated as…
Stock sale by the shareholder (either estate or beneficiary of the estate) if 2 conditions are met
Effect of redemptions on distributing corporate property
The rules for gain or loss recognition for corp. that distributes
Property in redemption for stock are same as sec. 311
Property distributions not in redemption of stock
Corporate gain or loss on property distributions 2
1 Corporation recognizes gain when it redeems its stock by
Distributing property that has appreciated in value
2 corp. recognizes no loss when it redeems its stock by distributing
Property that’s declined in value
2 ways stock redemption effects a corporation’s E&P
1 if corp. distributes appreciated property, the excess of FMV
over adjusted basis increases the balance of the E&P account
2 if corp distributes cash or other property, the corp.’s E&P
Balance is reduced accordingly (reduction depends on treatment
As sale or dividend)
Redemption is treated as a dividend: effect on corporation’s E&P
Reduces its E&P by the amount of any cash, principal amount
Of obligations and greater of adjusted bias or FMV of property
Distributed
Redemption is treated as a sale: effect on corporation’s E&P
Corp. reduces E&P by portion of its current and accumulated
E&P attributed to redeemed stock
E&P is reduced by the percentage of total outstanding shares
Redeemed
Bailout
Scheme that allows corp. to make dividend distribution that
For tax purposes is treated as sale of capital asset
Typical 4 step proceedings in preferred stock bailout
1 corp. issued non taxable dividend no voting preferred stock
To its common shareholders
2 recipient shareholder then sold preferred stock at its FMV
To an unrelated third party, realizing capital gain
3 corp. redeemed preferred stock from 3rd party
4 or the corp redeemed the preferred stock from the shareholder
What does section 306 prevent
Preferred stock bailouts
Makes them get treated as a dividend, because stock is
considered tainted
Section 306 stock , 4 kinds (note no stock received is common)
1 stock received in non taxable stock dividend
2 stock received in non taxable corporate reorganization or division
3 stock that has basis determined by reference to basis of
Sec. 306 stock
4 stock acquired in exchange to which sec. 351 applies if
Receipt of money would have been treated as dividend
Exceptions to section 306 treatment 4
1 shareholder disposes of all ownership interest in common and
Preferred stock
2 corp. redeems all shareholder’s stock in partial liquidation
Qualifying for sale treatment
3 shareholder gifts 306 stock to family member (it will be taxed
Like 306 if family member sells)
4 taxpayer demonstrates to IRS that disposition was not due to
Tax avoidance
Section 304, what does it regulate?
Taxation of stock redemption between related corporations
Either taxed as dividend or capital gain depending on situation
Controlling shareholder
Shareholder that has over 50% ownership of voting and value of
Corporation’s stock
If a controlling shareholder transfers stock in one corporation to the other corporation in exchange for property, the exchange must…
Be recast as a redemption
Brother sister corporations: when redemption is treated as distribution
Treated as a dividend based on being less than the acquiring corp.’s E&P + the issuing corp.’s E&P
Section 304: parent subsidiary corporations, when shareholder sells stock in parent corporation to a subsidiary of parent, how is the sale treated?
Sale is treated as a dividend based on combined E&P of both
Corporations
Hedge agreement with shareholder-employee
Agreement obligates shareholder-employee to repay an portion
Of salary the IRS disallows as corporate deduction
Bootstrap acquisition
Shareholder sells part of his or her stock to purchaser
and then causes corporation to redeem shareholder’s remaining shares
