Corporate Redemptions and Liquidations Flashcards
How are redemptions that have the effect of a dividend taxed?
-As dividends
What are the 3 methods for a redemption to qualify as a sale?
1) NEED (ambiguous but essentially a meaningful reduction in shareholder’s rights in voting and earnings)
2) Substantially disproportionate redemption meeting the control test (own less than 50% of shares) and reduced interest test (own less than 80% of shares previously owned)
3) Complete termination of shareholder’s interest in corporation (direct and indirect interest)
How is indirect or constructive ownership determined?
-Through attribution rules
Who’s included in family attribution for redemption tests?
-Spouse, children, grandchildren, and parents
What are the rules for entity attribution for corporations?
- Entity to owner: shareholder subject to entity attribution if corporation controlled by shareholder (50% or more) resulting in proportionate interest
- Owner to entity: stock owned by a 50% or greater shareholder deemed to be owned in full by corporation
What are entity attribution rules for partnerships?
- Entity to owner: Stock owned by a partnership deemed to be owned by partner based on proportionate interest in partnership
- Owner to entity: Stock owned by a partner deemed to be owned in full by the partnership
What are the entity attribution rules for Estates and Trusts?
-Similar to rules for partnerships
What is the corporate reduction of E&P for redemptions?
-Lower of 1) Redeemed stock’s proportionate share of E&P or 2) amount of the redemption
How are partial liquidations treated?
-As a sale by noncorporate shareholders
What are the two tests for partial liquidations (objective and subjective)?
1) Objective- corporation completely terminates a qualifying business (conducted for 5 yrs or more)
2) Subjective- must be NEED meaning a genuine contraction in business and not just sale of excess inventory
What is a partial liquidation?
-A contraction of the corporate business
Can a redemption used to pay death taxes be treated as a sale?
-Yes under two conditions
When are stock distributions not taxable to the shareholders?
-If there’s no option to receive property in lieu of stock and no proportionate change in shareholders’ interests
What is a stock bailout?
-Distribution of nonvoting stock followed by sale or redemption of stock by corporation
How are stock bailouts treated?
-As a dividend to the extent of E&P
