Taxes: Corporate Redemptions & Liquidations

Question 1

Taxes:
Corporate Redemptions & Liquidations
Redemptions

Answer 1

Redemptions
- corporation repurchases stock from a shareholder
- treated by shareholder as sale of stock that will result in gain/loss
- or it could look like a dividend distribution & must be taxed as such
2 Advantages
- offset stock basis against redemption proceeds
- any resulting gain is treated as capital gain

Question 2

Taxes:
Corporate Redemptions & Liquidations
Redemptions
3 Methods to Qualify

Answer 2

3 Methods to Qualify

1. treated as sale if not essentially equivalent to a dividend (NEED) (reduction of rights)
2. substantially disproportionate redemption will qualify as a sale if passes the control and reduced interest tests
   a) control: own less than 50% voting shares
   b) reduced interest: own less than 80% shares prior to redemption
3. complete termination qualifies as a sale

Question 3

Taxes:
Corporate Redemptions & Liquidations
Redemptions
Attribution

Answer 3

Attribution
- includes shares owned directly and indirectly
Family Attribution
- stock owned by spouse, children, grandchildren, and parents (not siblings here)
Entity Attribution
- stock owned by corp, partnership, trust, or estate deemed to be owned by taxpayer who is owner/beneficiary
1. Entity to Owner: shareholder owns 50% or more. if less none is attributed
2. Owner to Entity: stock owned 50%+ by shareholder deemed owned 100% by entity
Partnership Attribution
1. Entity to Owner: stock owned by partnership deemed owned by partner based on ownership interest (all partners)
2. Owner to Entity: Stock owned by partner deemed to be owned in full by partnership (all partners)

Question 4

Taxes:
Corporate Redemptions & Liquidations
Redemptions
Consequences to Corporation

Answer 4

Consequences to Corporation

• if corp distributes appreciated property, appreciation is recognized by corp
• loss on distributive assets that have declined in value is disallowed
• may have sec 1245 or 1250 depreciation recapture
• corp must reduce E&P by recapture to lower of:
  a) redeemed stock’s proportionate share of E&P or
  b) amount of redemption
• if dividend, greater of FMV or adj basis less liabilities

Question 5

Taxes:
Corporate Redemptions & Liquidations
Partial Liquidation

Answer 5

Partial Liquidation

• treated as a sale by non-corporate shareholders
  1. Objective Test: completely terminate one qualifying business and continue to operate another (5 years prior)
  2. Subjective Test: not essentially equivalent to a dividend, genuine contraction, not sale of excess inventory

Question 6

Taxes:
Corporate Redemptions & Liquidations
Redemption used to pay death taxes

Answer 6

Redemption used to pay death taxes

• may be treated as a sale & no additional tax due if:
  1. stock held by decedent 35%+
  2. limited to federal & state death tax and funeral and admin expenses

Question 7

Taxes:
Corporate Redemptions & Liquidations
Stock Distributions

Answer 7

Stock Distributions

• not taxable to shareholder if no option to receive property instead of stock
• Stock bailout treated as dividend to extent of E&P

Question 8

Taxes:
Corporate Redemptions & Liquidations
Corporate Liquidations

Answer 8

Corporate Liquidations
- complete dissolution of corp and distribution of remaining assets
- shareholders get assets in return for cancelling shares
Shareholders Recognize Gain or Loss
= FMV distribution - adj basis shares - tax paid by corp
- any gain/loss will be capital
- if distribution subject to liability, reduce FMV
- adj basis of property received = FMV - tax paid by corp - liability assumed
Corporation will Recognized Gain or Loss
= FMV distribution - adj basis distribution
- nature of gain/loss depends on nature of asset
- FMV cannot be less than liabilities given
- expenses deducted on last corp return
- loss on distribution in complete liquidation to shareholder owning more than 50%, loss not recognized if:
- distribution of each asset not pro rata
- or disqualified (property acquired in tax-free incorporation or capital contribution 5 years prior)
Built In Losses
- disallowed if purpose was to recognize loss
- transfer occurs within 2 years plan of liquidation
- any decline in value after contribution is okay
Subsidiaries
- NO gain or loss recognized if
- parent owns 80%+ voting stock
- distribute assets within current year
- parent taxes carryover basis
- minority shareholders recognize gain or loss