R4-M7 Entity/Owner Transactions

Question 1

what are general netting rules?

Answer 1

• Both current and accumulated E&P (retained earnings) are POSTITIVE: distributions are dividends to the extent of current and accumulated E&P
• Both current and accumulated E&P are NEGATIVE: distributions are NOT dividends
• Current E&P is POSITIVE and accumulated E&P is NEGATIVE: distributions are dividends to the extent of current E&P only
• Current E&P is NEGATIVE and accumulated E&P is POSITIVE: 2 amounts are netted. Distributions are dividends if the net amount is positive

Question 2

what is dividend payments to preferred shareholders considered?

Answer 2

dividend income

Question 3

what is tax treatment of stock dividends?

Answer 3

• generally NOT taxable unless the shareholder has a choice of receiving cash or other property
• value is FMV. debt assumed does not affect the basis of property
• allocation basis: dividing the basis of the old stock by the total (old + new) shares

Question 4

what are rules of stock redemption?

Answer 4

• stock redemption occur when a corporation buys back stock from its stockholders.
• ## recognize gain/loss on any appreciated property distributed

Question 5

what are tax rules of distributions from a C corp to a shareholder?

Answer 5

1. Distributions are considered dividend income (ordinary income) to the extent of the C corporation’s current or accumulated earnings and profits.
2. Any excess distribution in step 1 is treated as nontaxable return of capital to the extent of a shareholder’s basis.
3. Any excess of both E&P (1) and shareholder’s basis (2) is treated as capital gain

*Note: a dividend paid in property other than money is taxable to the shareholder to the extent of the property’s FMV

Question 6

what is tax treatment of non-cash distribution to shareholder for a corp?

Answer 6

• recognize capital gain as if the corp sell the assets
• loss is not deductible and DO NOT net with capital gain if not liquidating. If liquidating, net with gains
• distribution of inventory is considered ordinary not capital gain/loss

Question 7

what are tax treatments of distribution of non-cash property in complete liquidation of a corp?

Answer 7

• subject to 2 levels of taxation
  + 1st: the corp must recognize gain/loss as if the corp sold the assets at FMV
  + 2nd: the shareholder would report gain/loss determined by the difference between FMV of the assets received and the shareholders’ adjusted basis of the stock

Question 8

what are tax treatments of reorganization events?

Answer 8

• if a shareholder owns at least 80% of the stock and liquidates, no gain or loss is recognized by parents or subs
• assets transferred to the parent of the liquidating corp generally have a carry over basis
• Nontaxable event

Question 9

what is tax treatment of section 1244 small business stock (worthless stock)?

Answer 9

• when a corp’s stock is sold or becomes worthless, the original stockholder can be treated as having an ordinary loss (fully tax deductible) up to 50k for single (MFJ 100k) per year
• any excess loss would be capital loss and use to offset capital gain with maximum 3k deductible per year
• Loss is available ONLY to the original owners of the stock. A person who inherited the section 1244 stock loss is not able to deduct it.