Chapter 13 – Taxation Of Distributions From Corporations Flashcards
Distributions from a corporation to a shareholder are taxed in what three phases?
- 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”.
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?
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.
If a company pays a dividend in form of property, instead of a cash dividend, how will that property dividend be taxed?
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)
When certain transactions are taxed as a dividend, even though they are not declared by the board of directors as a dividend.
constructive dividend
When a debtor of a corporation makes payments directly to the shareholders.
constructive dividend
This type of dividend is when a shareholder enjoys the personal use of property owned by the corporation, such as a car.
constructive dividend
When a corporation relieves a shareholder of liability for a debt owed.
constructive dividend
This type of dividend is when corporation receives life insurance proceeds and then pays the proceeds to shareholders.
constructive dividend
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.
constructive dividend
When a corporation sales property to a shareholder for less than its value; “bargain sale”
constructive dividend
When a shareholder/employee is paid more than the value of their services rendered.
constructive dividend
Qualified dividends are generally taxed at a maximum ordinary rate of…
20%.
Dividends are generally taxed at…
ordinary rates.
What makes a dividend a qualified dividend?
It’s holding period.
For a dividend to become a qualified dividend how long would a shareholder have to hold the dividend?
More than 2 months out of a 4 month span.
Name 2 types of companies that give qualified dividends.
- Domestic/Foreign Corporations
2. Mutual Funds
Name 2 types of companies that give non-qualified dividends?
- Credit Unions
2. Mutual Insurance Companies
Qualified dividends are taxed at…
favorable rates.
Non-qualified dividends are taxed at…
ordinary rates.
Preferred stock dividends are considered…
non-qualified dividends.
Cash distributions paid to shareholders, when the company has no current/accumulated earnings and profits can reduce the…
basis of the shareholder’s stock.
When a company purchases its own stock.
stock redemption
For tax purposes, how is stock redemption taxed?
As a dividend and not a capital gain.
Under what 5 circumstances would a dividend be taxed as a capital gain and not taxed as a dividend?
- not essentially a dividend
- complete redemption
- substantially disproportionate
- partial liquidation
- Section 303**
(Basically there has to be a reduction in your ownership interest of the company. )
When a the shareholder terminates his or her entire interest in the corporation.
complete redemption
When a shareholder owns less than 50% voting power AND your ownership drops 80%.
substantially disproportionate
When the nature of the distribution is reviewed at the corporate level and a part of the company is shut down.
partial liquidation
When stock owned by one individual will be considered owned by another individual for tax purposes.
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%.)
Name the 2 types of attributions.
family attribution
entity attribution
An individual will owns stock that is also owned by another family member. Those 4 family member could be…
spouses
parents
children
grandchildren
Under what circumstances will the IRS waive the family attribution rules?
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
When an someone owns stock that is also partially owned by another entity.
entity attribution
How is a partnership or S-Corporations attribution ownership figured?
Proportion to the interest in the entity.
How is a trust’s attribution ownership figured?
Using an actuarial calculation
When an estate of a deceased shareholder redeems stock of a corporation in order to pay certain estate cost. (taxed as “capital gains”)
Section 303 Redemption
Under Section 303, proceeds must be used to pay for 3 types of expenses.
funeral expenses
federal estate and state death taxes
estate administration cost
Section 303 stock redemption will be taxed as…
capital gains.
When an individual dies, the stock owned receives a ___________ to FMV.
step-up in basis;
__________________ rules do not apply to Section 303 redemption.
constructive ownership (family attribution; entity attribution)
What happens if the proceeds from a Section 303 redemption are used to pay for your will?
The will be taxed at ordinary rates
To qualify for Section 303 redemption, the stock must be included in the decedent’s…
gross income.
To qualify for Section 303 redemption the stock must be greater than ___% of adjusted gross estate.
35%
To qualify for Section 303 redemption the decedent must actually have a ________ for funeral expenses, death taxes, admin cost.
liability
To qualify for Section 303 redemption the process must happen within ______________ after the filing of the estate tax return.
3 years and 90 days
