M8: Entity/Owner Transactions

Question 1

Section 1244 qualifying stock (aka small business stock)

Answer 1

loss resulting from sale/exchange of 1244 stocks are treated as ordinary losses up to $50k/100k (MFJ), in any tax year. Remaining losses in excess are capital loss.

Losses are only available to the original owners of the stock.

Question 2

Dividends defined: Earnings and profits = RE

Answer 2

1st Current EP (by year end) - taxable dividend
2nd Acc. EP (distribution date) - taxable dividend
3rd Return of capital (no E and ;P) - tax free and reduce basis of common stock
4th - Capital gain distribution (no EP/no basis) - taxable as a capital gain

Question 3

Matching cash dividend to source

Answer 3

Current Earnings & profits are allocated on a pro rata basis to each distribution regardless of the actual date of the distribution

Accumulated Earnings and; Profits are applied in chronological order, beginning with the earliest distribution

Question 4

Parent/Subsidiary Liquidation

Answer 4

No gain or loss is recognized. Nontaxable event. Parent assumes basis of the subsidiary assets and liabilities as well as any unused NOL or capital loss or charitable le contribution carryovers.

Question 5

Corporate Sells Assets and Distributes Assets to Shareholders

Answer 5

Corporation recognizes gain or loss (as normal) on the sale of the assets; and shareholder recognize gain or loss to the extent that cash exceeds adjusted basis of stock. Losses are not deductible.

Distributes Assets: Corporation recognizes gain or loss as if it sold the assets for the FMV and shareholders gain or loss to the extent that the FMV of assets received adjusted basis of stock.

If a property’s fair market values less than the amount of the liability assumed, the property fair market value is assumed to be the amount of the liability assumed by the shareholder.