Entity/Owner Transactions Flashcards
In formation of a corporation, gains/losses are generally not recognized by shareholders and corporations upon contribution of property in exchange for stock when immediately after the transfer, the contributing shareholders, in aggregate, own _____ of the corporation
80%
subsequent transfers of stock will most likely not result in the 80% control test, so they will be treated as a sale to the corporation for FMV which will result in gain/loss recognized by the contributing shareholder
What is the order a dividend goes through when it is received by a shareholder?
It first goes against current year E&P (taxable dividend)
Next it goes against accumulated E&P (taxable dividend)
Next it is a return of capital to the extent of stock basis (nontaxable and reduces basis of common stock)
Lastly it is a capital gain (taxable capital gain once basis has run out)
How current and accumulated E&P are treated (positive and negative)
Both positive: distributions are dividends to the extent of the current and accumulated E&P
Both negative: distributions are not dividends
Current is positive and accumulated is negative: distributions are dividends to the extent of current E&P only
Current is negative and accumulated is positive: the two amounts are netted and distributions are dividends if the net amount is positive
What are stock dividends?
A distribution by a corporation of its own stock to its shareholders. As a general rule, they are not taxable unless the shareholder has a choice of receive cash or other property. Then it is taxable regardless of the choice they make. The value of the taxable stock dividend is the FMV on the distribution date
For a corporation, the general rule is that paying a dividend does not create a taxable event as it is a reduction of E&P. However, if a corporation distributes _____, the corporation recognizes _____ as if the property had been sold (FMV - adjusted basis)
appreciated property & gain
What is a stock redemption?
It is when a corporation buys back stock from its shareholders. If the redemption qualifies for sale or exchange treatment, gain/loss is recognized by the shareholder. If not, the redemption is treated as a dividend to the extent of the corporation’s E&P.
The corporation can recognize gain (but not loss) on any appreciated property distributed as though it had sold the property for its FMV
What are the two forms of corporation liquidation?
1) the corporation sells the assets and distributes the cash to the shareholders (C: sale price - basis = gain/loss | S: proceeds - stock basis = gain/loss)
2) the corporation distributes assets to the shareholders (C: FMV - basis = gain/loss | S: FMV - stock basis = gain/loss)
this means that the transaction is subject to double taxation since both the corporation and the shareholder must recognize gain/loss
T/F: no gain/loss is recognized by either the parent or the subsidiary when the parent, who owns at least 80%, liquidates the subsidiary
True
the parent assumes the basis of the subsidiary’s assets as well as any unused NOL or capital loss or charitable contribution carryovers
T/F: a reorganization is treated as a nontaxable transaction because it results in the continuation of a business in a modified form
True
to meet the “continuity requirement” the acquiring corporation must continue the business of the old entity or use a significant portion of the old corporation’s assets
Why are reorganizations nontaxable (except to the extent of boot received)?
The shareholders have not liquidated their investment but have continued operations in a modified form
When a corporation’s stock is sold or becomes worthless, an original stockholder can be treated as having an _____ (fully tax deductible) instead of a _____
ordinary loss & capital loss
the amount is $50k ($100k for MFJ)
any loss that exceeds this amount would be a capital loss which would offset capital gains and then a max of $3k per year would be deductible
