Chapter 13 – Taxation Of Distributions From Corporations

Question 1

Distributions from a corporation to a shareholder are taxed in what three phases?

Answer 1

• Distributions up to the company’s current and accumulated earnings/profits is a “dividend”.
• Distributions in excess of earnings/profit is considered “return of capital” up to the shareholders basis.
• Distributions that exceeds the basis its “capital gain”.

Question 2

John is the sole shareholder of ABC company, which has $40,000 in current and cumulated earnings and profits. His basis in the stock is $7000. The company distributes $50,000 to Jon, which is not compensation for services. How will the distributions be taxed?

Answer 2

John will treat the first $40,000 as a dividend, $7000 will be considered tax-free return of capital, and the remaining $3000 will be taxed as capital gain.

Question 3

If a company pays a dividend in form of property, instead of a cash dividend, how will that property dividend be taxed?

Answer 3

I would have to report the fair market value of the property as a dividend and the company would have to report any gain on the property.

(The Building cost $100K. It sold for $150K. The company pays $50K in taxes, and I pay $150 dividends)

Question 4

When certain transactions are taxed as a dividend, even though they are not declared by the board of directors as a dividend.

Answer 4

constructive dividend

Question 5

When a debtor of a corporation makes payments directly to the shareholders.

Answer 5

constructive dividend

Question 6

This type of dividend is when a shareholder enjoys the personal use of property owned by the corporation, such as a car.

Answer 6

constructive dividend

Question 7

When a corporation relieves a shareholder of liability for a debt owed.

Answer 7

constructive dividend

Question 8

This type of dividend is when corporation receives life insurance proceeds and then pays the proceeds to shareholders.

Answer 8

constructive dividend

Question 9

This is when a company pays premiums on a life insurance policy owned by and insuring a shareholder, and the corporation is not the beneficiary.

Answer 9

constructive dividend

Question 10

When a corporation sales property to a shareholder for less than its value; “bargain sale”

Answer 10

constructive dividend

Question 11

When a shareholder/employee is paid more than the value of their services rendered.

Answer 11

constructive dividend

Question 12

Qualified dividends are generally taxed at a maximum ordinary rate of…

Answer 12

20%.

Question 13

Dividends are generally taxed at…

Answer 13

ordinary rates.

Question 14

What makes a dividend a qualified dividend?

Answer 14

It’s holding period.

Question 15

For a dividend to become a qualified dividend how long would a shareholder have to hold the dividend?

Answer 15

More than 2 months out of a 4 month span.

Question 16

Name 2 types of companies that give qualified dividends.

Answer 16

1. Domestic/Foreign Corporations

2. Mutual Funds

Question 17

Name 2 types of companies that give non-qualified dividends?

Answer 17

1. Credit Unions

2. Mutual Insurance Companies

Question 18

Qualified dividends are taxed at…

Answer 18

favorable rates.

Question 19

Non-qualified dividends are taxed at…

Answer 19

ordinary rates.

Question 20

Preferred stock dividends are considered…

Answer 20

non-qualified dividends.

Question 21

Cash distributions paid to shareholders, when the company has no current/accumulated earnings and profits can reduce the…

Answer 21

basis of the shareholder’s stock.

Question 22

When a company purchases its own stock.

Answer 22

stock redemption

Question 23

For tax purposes, how is stock redemption taxed?

Answer 23

As a dividend and not a capital gain.

Question 24

Under what 5 circumstances would a dividend be taxed as a capital gain and not taxed as a dividend?

Answer 24

1. not essentially a dividend
2. complete redemption
3. substantially disproportionate
4. partial liquidation
5. Section 303**
   (Basically there has to be a reduction in your ownership interest of the company. )

Question 25

When a the shareholder terminates his or her entire interest in the corporation.

Answer 25

complete redemption

Question 26

When a shareholder owns less than 50% voting power AND your ownership drops 80%.

Answer 26

substantially disproportionate

Question 27

When the nature of the distribution is reviewed at the corporate level and a part of the company is shut down.

Answer 27

partial liquidation

Question 28

When stock owned by one individual will be considered owned by another individual for tax purposes.

Answer 28

constructive ownership

(If you and your wife own stock, which equals 50% for each of you, you sell you stock, your wife’s 50% now becomes part of your ownership too. Which brings it to 100%.)

Question 29

Name the 2 types of attributions.

Answer 29

family attribution

entity attribution

Question 30

An individual will owns stock that is also owned by another family member. Those 4 family member could be…

Answer 30

spouses
parents
children
grandchildren

Question 31

Under what circumstances will the IRS waive the family attribution rules?

Answer 31

no more interest in the company after you sell.
You don’t buy any interest for another 10 years
You didn’t buy any stock 10 years prior.
You can’t be an officer, director, or employee

Question 32

When an someone owns stock that is also partially owned by another entity.

Answer 32

entity attribution

Question 33

How is a partnership or S-Corporations attribution ownership figured?

Answer 33

Proportion to the interest in the entity.

Question 34

How is a trust’s attribution ownership figured?

Answer 34

Using an actuarial calculation

Question 35

When an estate of a deceased shareholder redeems stock of a corporation in order to pay certain estate cost. (taxed as “capital gains”)

Answer 35

Section 303 Redemption

Question 36

Under Section 303, proceeds must be used to pay for 3 types of expenses.

Answer 36

funeral expenses
federal estate and state death taxes
estate administration cost

Question 37

Section 303 stock redemption will be taxed as…

Answer 37

capital gains.

Question 38

When an individual dies, the stock owned receives a ___________ to FMV.

Answer 38

step-up in basis;

Question 39

__________________ rules do not apply to Section 303 redemption.

Answer 39

constructive ownership (family attribution; entity attribution)

Question 40

What happens if the proceeds from a Section 303 redemption are used to pay for your will?

Answer 40

The will be taxed at ordinary rates

Question 41

To qualify for Section 303 redemption, the stock must be included in the decedent’s…

Answer 41

gross income.

Question 42

To qualify for Section 303 redemption the stock must be greater than ___% of adjusted gross estate.

Answer 42

35%

Question 43

To qualify for Section 303 redemption the decedent must actually have a ________ for funeral expenses, death taxes, admin cost.

Answer 43

liability

Question 44

To qualify for Section 303 redemption the process must happen within ______________ after the filing of the estate tax return.

Answer 44

3 years and 90 days