T2-M2 Equity/Owner Transactions Flashcards
1
Q
what are CORPORATION tax consequences when a corp issuing stock in exchange for property?
A
- no gain/loss is recognized in the following transactions:
+ formation - issuance of CS to shareholder who contributes property for stocks
+ reacquisition - purchase of treasury stock
+ resale - sale of treasury stock - basis of the property received by a corporation from a transferor/shareholder is the GREATER of:
+ shareholder’s adjusted basis (NBV) of the property (plus any gain recognized by the shareholder); or
+ debt assumed by the corporation (minus any cash contributed)
2
Q
what are SHAREHOLDER tax consequences when a shareholder contribute a property to exchange stock in a corp?
A
- shareholder will REALIZE any gain/loss by calculation:
FMV of the stock received
+ any liabilities assumed by the corp
+ FMV of boot received by shareholder - basis in the property contributed
= realized gain/(loss) - shareholder will NOT RECOGNIZE gain/loss if met 2 conditions below:
+ 80% control: the shareholders contributed property own at least 80% of the voting/nonvoting stock
+ No boot receipt/Cancellation Of Debt: solely in exchange for stock - shareholders receive CS for services rendered must recognize the FMV as ordinary income
shareholder’s basis in CS =
+ cash contributed
+ FMV of services contributed
+ adjusted basis (NBV) of noncash property contributed
+ gain recognized by shareholder (boot received/contributed liabilities in excess of basis)
- FMV of boot received by shareholder
- liabilities assumed by the corporation
=> if shareholder’s basis is negative per above formula, it is a taxable gain to the shareholder and his/her basis is zero
3
Q
what are dividends and its netting rules?
A
- a dividend is a distribution of property by a corp out of its E&P (retained earnings)
- the general rule is that current and accumulated E&P are NOT netted. Dividends come from current E&P first, then from accumulated E&P
+ Both current and accumulated E&P are POSITIVE: distributions are dividends
+ 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 and distributions are dividends if the net amount is POSITIVE
4
Q
what are rules of matching cash dividends to source?
A
- the purpose is to determine the taxable income for each dividend payment during the year
- when dividends are in excess of E&P, the following allocation applies:
+ current E&P are allocated on a pro rata basis to each distribution, regardless of the actual date of the distributions. Ex: if 4 dividend payments during the year, each payment must have the same pro rata amount from current E&P
+ accumulated E&P are applied in chronological order, beginning with the earliest distribution. Ex: the amount of each payment from this source is whatever left after current E&P. Also, if after running out of this source, the next source is shareholder’s stock basis (return of capital)
5
Q
what are constructive dividends?
A
- when a corporation tries to avoid double taxation, it tries to hide dividends in forms of expenses in the following transactions. The IRS does not allow, so these transactions will be reclassify as dividends by the IRS:
+ excessive salaries paid to shareholder employees (unreasonable compensation)
+ excessive rents and royalties
+ Loans to shareholders where there is no intent to repay
+ sales of assets below FMV
6
Q
what are stock dividends?
A
- stock dividends are distribution by a corporation of its own stock to its shareholders
- generally not taxable unless the shareholder has a choice of receiving cash or other property
- basis of nontaxable of old and new identical stock dividends = basis of old stock / (old + new numbers of shares)
7
Q
what is property distribution taxation for shareholders perspective?
A
- individual shareholder: FMV of property received
- corporation shareholder:
- FMV of property received
- eligible for DRD
8
Q
what is property distribution taxation for corporation perspective?
A
- payments of dividends do not create taxable events. they are reductions of E&P for corporation
1. distribution of appreciated property - the corporation recognizes GAIN as if the property had been sold
- the recipient shareholder includes the FMV of property in income as dividends (to the extent of E&P)
- distribution of depreciated property
- the corporation CANNOT recognize a loss
- dividend is taxable to shareholder and basis is FMV
9
Q
what is taxation for corporation liquidation?
A
- If a corporation is liquidated, the transaction is subject to double taxation (both corporation and shareholders must recognize gain/loss)
- Corporation can deduct liquidation expenses on its final TR such as filing fees and professional fees
- There are 2 forms:
1. corporation sells assets and distributes cash to shareholders
+ corp recognizes gain/loss on the sale of assets
+ shareholders recognize capital gain/loss to the extent that cash exceeds adjusted basis of stock
2. corporation distribute assets to shareholders
+ corp recognizes gain/loss as if it sold the assets for FMV
+ shareholders recognize capital gain/loss to the extent that the FMV of assets received exceeds the adjusted stock basis
10
Q
what is taxation for reorganizations?
A
- Reorganizations are nontaxable events for both corp and its shareholders, except shareholders recognized capital gain if they received boot or COD or addition to stock/securities
- 6 types of reorganizations:
+ Type A: mergers or consolidations
+ Type B: the acquisition by one corp of another corp’s stock, stock for stock
+ Type C: the acquisition by one corp of another corp’s assets, stock for assets
+ Type D: dividing of the corp into separate operation corps
+ Type E: recapitalizations
+ Type F: a mere change in identity, form, or place of organization - when liquidating sub, no gain/loss is recognized by either parent (own 80%) or sub. assets transferred to parent have carryover basis and any unused NOL or capital loss or charitable contribution carryovers or any liabilities
11
Q
what is taxation for worthless stocks (section 1244)?
A
- maximum ordinary loss deduction applies to original owner of the stocks only (inherited owners are not qualified):
+ MFJ: $100K
+ single filers: $50K
+ any loss excess of this amount would be capital loss and can offset capital gain. Maximum $3K ($1500 if MFS) per year can be deductible
+ qualifications: cash or property paid to corps in exchange for its first $1M of capital stock - Exclusion of gain: non-corp shareholder holds QSBS for at least 5 years can exclude 100% of gain on sale of stocks.
- Maximum exclusion per shareholder is greater of:
+ 10 times of shareholder’s basis
+ $10M ($5M if MFS) - Qualifications of corps
+ stocks issued after 08/10/1993
+ acquired at original issuance
+ C corp only
+ Less than $50M of capital as of date of stock issuance
+ 80% or more of corp’ assets are used in active qualified trades or businesses - includable gain is taxed at regular tax rates
12
Q
what is taxation for imputed interest (loans between C corp and shareholders below market rate)?
A
- if loan is made from corporation to shareholders at interest rate lower than market rate (AFR), imputed interest rules may apply
- imputed interest is difference between market rate (AFR) and actual rate charged on the below-market rate
- imputed interest is often treated as dividends if the shareholder is not also an employee. if shareholder is also an employee, the imputed interest is normally treated as dividends if the employee owns more than a “de minimis” amount of stock
- if loan was made solely in connection with performance of services, it is treated as compensation regardless amount of stock owned by shareholder/employees
