Chapter 5 - Property and Stock Dividends Flashcards
Property Dividend
Generally treated in the same manner as a cash distribution, measured by the fair market value of the property on the date of distribution. Distribution of appreciated property causes the distributing C or S corporation to recognize gain. The distributing corporation does not recognize loss on property that has depreciated in value. §§ 311 and 1371(a).
What is the effect of property dividends on the shareholder?
- Amount distributed measured by the FMV on date of distribution
- Portion of property distribution covered by existing E&P is a dividend, excess treated as return of capital
- If FMV exceeds both E&P and the shareholder’s stock basis, a taxable (capital) gain results
If, as part of the distribution, the shareholder assumes a liability of the corporation or if the property the shareholder receives is subject to a liability…
The amount of the distribution is reduced by the liability, but not below zero
What is the basis of the distributed property for the shareholder?
The FMV of the property on the date of distribution
What is the effect of property dividends on the corporation?
- All distributions of appreciated property generate gain to the distributing corporation
- Don’t recognize a loss on distribution of property
From the corporation’s perspective, if the distributed property is subject to a liability in excess of basis or the shareholder assumes the liability, what happens?
For determining gain on the distribution, the FMV of the property is treated as being at least the amount of the liability
Corporate distributions reduce E&P by…
- the amount of money distributed or
- by the greater of the FMV or the adjusted basis minus liability on the property
Stock Dividends
Not taxable if pro rata distributions of stock or stock rights on common stock. Section 305 governs the taxability of stock dividends and sets out five exceptions to the general rule that stock dividends are nontaxable.
What happens when a stock dividend is declared?
The shareholder ends up with additional shares of stock but retains the same total stock basis. Shareholders’ basis is reallocated across the combination of the original and new shares (the per-share basis decreases).
Stock splits: 4-for-1 example
A shareholder with 3 additional shares for each share held before the split. Total basis of the original shares is reallocated acroos all shares after the split. Each share carries a 1/4 per-share basis of the original shares.
What happens if the dividend stock is not identical to the underlying shares ?
(for example a stock dividend of preferred on common)
Basis is determined by allocating the basis of the formerly held shares between the old and new stock according the the FMV of each. Holding period includes the holding period of the original stock.
Generally, stock dividends are excluded from income if they are pro rata stock distributions paid on common stock. What if the stock dividend is a disproportionate distribution?
The stock dividend is taxable
If a stock dividend is determined to be taxable…
The FMV of the shares received is included in the shareholder’s gross income. The basis for the newly received shares is FMV. The holding period starts on the date of receipt.
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 taxable.
If the rights are taxable, the recipient has income equal to…
the fair market value of the rights. The FMV becomes the shareholder’s basis in the rights.
