Module 8: Entity/Owner Transactions Flashcards
When are distributions to shareholders taxable to shareholders?
If distributions are classified as dividends
Define dividend
Distribution property by a corporation out of its earnings and profits
What is the order of the source of distributions?
- Current E&P
- Accumulated E&P
- Return of capital (no E&P)
When dividends are in excess of E&P, what allocation applies?
- Current E&P = pro rata basis to each distribution
2. Accum. E&P = applied in chronological order
What are constructive dividends?
Hidden/disguised dividends (trying to get a tax deduction when giving money to shareholder)
What are examples of constructive dividends?
- excessive salaries paid to s/h employees
- excessive rents/royalties
- “loans” to s/h where there is no intent to repay
- sale of assets below FMV
Define stock dividends
Distribution by corp of its own stock to s/h
When would a stock dividend be taxable?
If the shareholder had a choice of receiving cash or other property
Taxable at FMV on distribution date
What is the general rule for the taxable amount to the corp paying dividend?
Generally a payment of dividend does not create a taxable event
What is the exception to the general rule of the taxable amount to corp paying dividend?
If corp distributes appreciated property, tax results are as follows:
- Corp recognizes gain as if property had been sold (FMV property - NBV = Corp gain)
- Recipient shareholder includes the FMV of property in income as dividends
- Corp cannot recognize loss
When do stock redemptions occur?
When corp buys back stock from its s/hs
Proportional stock redemption
Taxable dividend income (to s/h - ordinary income)
Disproportional (substantially disproportionate) stock redemption
Subject to taxable capital gain/loss to shareholder
What are the two forms of corporate liquidation?
- Corp sells assets and distributes cash to s/hs
2. Corp distributes assets to s/hs
What is the result of liquidation involving corp selling stock/distributing cash to s/h?
- Corp recognizes gain/loss on sale of assets (Sale price - Basis = Taxable gain/loss)
- S/h recognize gain/loss to extent cash exceeds adjusted basis of stock (Proceeds - Stock basis = Taxable gain/loss)
What is the result of liquidation involving corp distributing assets to s/h?
- Corp recognizes gain/loss as if it sold assets for FMV (FMV - Basis = Taxable gain/loss)
- S/h recognizes gain or loss to extent that FMV of assets exceeds adjusted basis of stock (FMV - Stock basis = Taxable gain/loss)
What are the different types of reorganizations?
- Mergers or consolidations (Type A)
- Acquisition by one corp of another corp’s stock, stock for stock (Type B)
- Acquisition by one corp of another corp’s assets, stock for assets (Type C)
- Dividing of corp into separate operating corps (Type D)
- Recapitalization (Type E)
- Mere change in identity, form, or place of organization (Type F)
Why is a reorganization treated as a nontaxable transaction?
Because it results in the continuation of a business in modified form
What is the continuity requirement?
The acquiring corp must continue the business of the old entity or use a signif. portion of the old corp’s assets
What is the control requirement for reorganization?
At least 80% of total voting power of all classes of stock and at least 80% of all other classes of stock
When a corp’s stock is sold or becomes worthless, how is it treated for original stockholder (for small business stock)?
Original stockholder can be treated as having an ordinary loss (fully tax deductible) instead of a capital loss, up to $50,000 ($100,000 MFJ)
Excess = capital loss
If a noncorporate s/h holds qualified small business stock for > 5 years, how much of the gain on sale/exchange of stock may be excluded?
100%
What is the exclusion max/limit?
Maximum exclusion and limited to 100% of the greater of:
- 10 times the taxpayer’s baiss in the stock; or
- $10M; $5M if MFS)
