R4 - Entity/Owner Transactions

Question 1

Corp Distributions: Dividends

Answer 1

• Come from current E and P and Accum E and P
• Order:
  1. Current E and P: Taxable as Divs
  2. Accum E and P: Taxable as Divs
  3. If no Current E and P and no Accum E and P, then Cap Gain.

Question 2

E and P Netting Rules

Answer 2

1. Both Current E and P and Accum E and P are positive = No problem
2. Current E and P is positive, Accum E and P is negative = Distributions are dividends to the extent of current E and P only.
3. If both negative, distributions are not dividends at all.
4. If current E and P is negative, and Accum is positive, the two amounts are netted.

Question 3

Multiple Distributions per Year:

Current E and P Allocation

Answer 3

• Prorata basis to each distribution.

(Period Distribution/Total Distributios) * Current E and P

Question 4

Multiple Distributions per Year:

Accum E and P Allocation

Answer 4

• Chronological order: exhausting each amount as we go.

Question 5

Corp Distributions: Constructive Dividends

Answer 5

• El vivo malo deduction

- Company trying to get a tax deduction rather than dividend taxation to SH.

Question 6

Corp Distributions: Stock Div

Answer 6

• Nontaxable, unless SH has choice of getting cash or other property, then it is taxed on FMV of property received.

Question 7

Corp paying dividend

Answer 7

• If a corp distributes appreciated property, it is a taxable event.
• Corp Gain = FMV - NBV; if loss, its not recognized. E and P is increased by Corp Gain.
• Recipient SH includes FMV as div income, since it comes from E and P (if no positive current or Accum E and P, then taxable div is the amount of gain)

Question 8

Stock Redemption: Treasury Stock

Answer 8

• Proportional: Taxable Div Income
• Disproportional (owns >50%; reduced ownership by 80%): Cap Gain Loss
• Partial Liquidation/Complete Buyout: Cap Gain Loss

Question 9

Corp Liquidation

Answer 9

1. Corp sells assets and distributes to SH

2. Corp distributes assets to SH

Question 10

Corp Liquidation: Corp sells assets and distributes to SH

Answer 10

1. Proceeds - Basis = Taxable Gain/Loss at Corp Level

2. Proceeds - Stock Basis = Taxable Gain/Loss at SH Level.

Question 11

Corp Liquidation: Corp distributes assets to SH

Answer 11

1. FMV - Basis = Taxable Gain/Loss at Corp Level

2. FMV - Stock Basis = Taxable Gain/Loss at SH Level.

Question 12

Tax-Free Reorgs

Answer 12

Nontaxable Event = NBV

• Corp: All tax attributes remain
• SH: SH retains original basis, but recognizes gain if boot received.

Question 13

Worthless Stock (Sec 1244)

Answer 13

• Instead of Cap Loss, get ordinary loss
• Up to $100,000 MFJ; $50,000 S
• Allowed only to original owners of stock. NO HEIRS

Question 14

Small Business Stock

Answer 14

• A non corp SH that holds small business stock for >5yrs may exclude 100% of gain on the sale or exchange of stock.

Question 15

Small Business Stock: Exclusion (Gains)

Answer 15

Exclude All OR
Greater of:
- 10x basis in Stock
- $10MM (MFJ); $5MM (MFS, S)

Question 16

Types of Tax-Free Reorgs

Track Day - MSSSRC

Answer 16

A = Mergers or Cons
B = Stock for Stock 
C = Stock for Assets
D = Split Corps/Dividing Corps
E = Recaps
F = Change of ID