REGULATION PERSONAL PART 2 Flashcards
When does the 80% test no longer apply for determining brother-sister corporations?
- corporate tax brackets
- the accumulated earnings credit
- the minimum tax exemption
When does an affiliated group exist?
- when one corporation owns at least 80% of the voting power of another corporation and holds shares representing at least 80% of its value
- test must be met on every day of the year
- can elect to file a consolidated tax return (insurance companies, S corporations, and foreign corporations are not eligible)
What are the special rules for consolidated tax returns?
- dividends between the affiliated corporations are eliminated on the consolidated tax return
- gains and losses on inter-company sales are deferred until disposition outside the group
- parent adjusts the basis of the stock of a consolidated subsidiary for allocable portion of income, losses, and dividends
- the members of the group must conform their tax year to the parent’s tax year
What are the rules for ordinary dividends from a C corporation?
step 1 - taxable as dividend income to extent of the shareholder’s pro-rata share of E&P
step 2 - excess is tax-free to extent of shareholder’s basis in stock (and reduces the basis)
step 3 - remaining distribution amount is taxed as a capital gain
What are the rules for property distributions from C corporations?
- amount distributed = FMV - liabilities on property
- basis of the property to the shareholder is the fair market value
What are earnings and profits?
- conceptually, E&P measures corporation’s economic ability to pay a dividend
- computed by making adjustments to taxable income
What are the adjustments for earnings and profits?
- increased for all items of income, including tax-exempt income, and is decreased for both deductible and nondeductible expenses and losses
- the alternative depreciation system (straight-line) must be used for E&P purposes
How is E&P reduced for dividends?
- for cash distributions - the amount of money distributed
- for property distributions - by the greater of the FMV or the adjusted basis of the property distributed, less the amount of any liability on the property
What are the special rules when it comes to current and accumulated E&P and dividends?
Current Accumulated Results
+ + dividend=both
- - not a dividend
+ - dividend=current
- + net first
What is the special rule when it comes to corporate gain?
- gain but not loss is recognized to a corporation that distributes property as a dividend, as if the property were sold to the shareholder at its FMV
What is a redemption?
A sale of stock back to the issuing corporation
When does a redemption qualify for sale or exchange treatment (i.e. capital gain treatment)?
if the shareholder owns:
- after the distribution, less then 80% of his or her total interest in the corporation before the distribution, and
- less than 50% of the total combing voting power of all classes of stock entitled to vote
What are some other situations where a redemption also qualifies as a sale or exchange?
- it is not essentially equivalent to a dividend
- complete termination of interest (family attribution rules are waived)
- partial liquidation: at least two active businesses for last five years and one is liquidated
- redemption used to pay death taxes (stock must be at least 35% of adjusted gross estate)
When does a liquidation occur?
- a liquidation occurs when an entity ceases to be a going concern and it distributes its assets
- expenses incurred in the liquidation are deducted on the last corporate return
What are the consequences of a liquidation to a corporation?
- gain or loss is recognized to a liquidating corporation on the distribution of property in complete liquidation
- for purposes of computing gain/loss, the FMV of the property will not be less than any liability that is attached to the property
When may losses not be recognized upon liquidation to a corporation?
- the property had been contributed in last five years, or
- the property is distributed to a related party
What are the consequences of a liquidation to a shareholder?
- shareholders treat the distribution as a sale/exchange; capital gain or loss is recognized
- the basis of assets received by the shareholder will be the FMV on date of distribution
What happens if a parent liquidates a subsidiary?
- in general, no gain or loss is recognized on the liquidation
- basis in the subsidiary’s assets will stay the same
What is a corporate reorganization?
- where two corporations (acquiring corporation and target corporation) choose to either merge or consolidate, or where one corporation spins off part of its operations into a separate corporation
What are the basic types of corporate reorganization?
- stock for asset reorganizations are “A” and “C”
- stock for stock reorganizations are “B”
- divisive reorganizations are “D”
- if the transaction doesn’t meet one of the reorganization classifications, all gains and losses are recognized
What are the rules for an A reorganization?
- stock for asset
- known as a statutory merger
- target corporation must dissolve
- voting or non-voting stock can be used by acquiring
- at least 50% or the consideration given to Target by acquiring must be stock
What are the rules for a B reorganization?
- stock for stock
- acquiring must own at least 80% of target after the transaction
- only voting stock can be used by acquiring
- no boot is allowed
What are the rules for a C reorganization?
- stock for asset
- does not have to be a statutory merger
- only voting stock can be used by acquiring
- boot is allowed, but it can’t exceed 20% of the consideration provided by acquiring
- acquiring must acquire substantially all of Target’s assets (90% of net asset value and 70% of gross asset value)
What are the consequences to shareholders of a reorganization?
- no gain or loss is recognized to the shareholders of the corporations involved in a tax-free reorganization if they receive only stock in exchange for property of the acquiring organization