Unit 14: Corporate Distributions and Liquidations

Question 1

The most common types of corporate distributions are:

Answer 1

• Ordinary dividends (either in cash or property)
• Capital gain distributions
• Nondividend distributions
• Distributions of stock or stock rights

Question 2

A distribution may reduced by the following liabilities:

Answer 2

• Any liability of the corporation the shareholder assumes
• Any liability applicable to distributed property, such as mortgage debt the shareholder assumes in connection with the distribution of ownership in a building.

Question 3

Corporations must furnish a 1099-DIV to:

Answer 3

Each shareholder who recieved a dividend of $10 or more during a calendar year by January 31

Question 4

If a corporation’s current E&P is less than the total distribution made during the year:

Answer 4

Part or all of each distribution is treated as a distribution of accumulated E&P

Question 5

Distributions by a corporation of its own stock or stock rights are tax-free to shareholders and are not deductible by the corporation. However, they may be treated as taxable property distributions in rare situations, including when:

Answer 5

• The shareholder has the choice to receive cash instead of stock
• The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation’s assets or earnings and profits to another shareholder
• The distribution is in convertible preferred stock
• The distribution gives preferred stock to some shareholders and common stock to other shareholders
  – The distribution is paid based on ownership of preferred stock

Question 6

Examples of “constructive distributions”:

Answer 6

• Payment of personal expenses
• Unreasonable compensation
• Unreasonable rents
• Cancellation of a shareholder’s debt
• property transfers of less than FMV
• Below-market or interest-free loans

Question 7

Common reasons why a corporation would redeem a shareholder’s stock include:

Answer 7

• To make sure that ownership of the corporation remains with people who were chosen by current owners or by the founders of the corporation
• To go private by redeeming all publicly-traded shares
• To increase the market price of the stock by lowering the number of outstanding shares
• To eliminate hostile minority shareholders
• To retire preferred stock to reduce or eliminate the dividend payments
• To avert a hostile takeover attempt.

Question 8

If a corporation buys back shares of its own stock from its shareholders, the transaction will either be treated as:

Answer 8

• A sale or exchange that results in capital gain (or loss) for the shareholder
• As a dividend, depending on the facts of the transaction

Question 9

Non-dividend treatment includes situations where:

Answer 9

• The shareholder’s proportionate interest and voting power in the corporation has been substantially reduced
• There was a substantially disproportionate redemption of stock, which means that the amount received by the shareholder is not in proportion to his stock ownership
• The redemption was due to a complete termination of a shareholder’s interest in the corporation
• The redemption is of stock held by a non-corporate shareholder and was part of a partial liquidation
• The distribution is received by an estate and does not exceed the sum of death taxes plus funeral and administration expenses to be paid by the estate.

Question 10

A corporation may not recognize a loss on a stock redemption unless:

Answer 10

• The redemption occurs in a complete liquidation of the corporation; or
• The redemption occurs on stock held by an estate

Question 11

966

Answer 11

used to report a corporate dissolution or liquidation and must be filed within 30 days after the resolution or plan is adopted to dissolve the corporation or liquidate any of its stock

Question 12

Corporate liquidation: When are gains/losses recognized for the shareholder?

Answer 12

Gain - Once all of the shareholder’s stock basis is recovered
Loss- Will not be recognized until the final distribution is received.

Question 13

A subchapter S corporation may have to pay corporate tax due to:

Answer 13

1. Excess net passive investment income
2. Built-in gains
3. Investment credit recapture
4. LIFO recapture

Question 14

An S corporation may also be responsible for other taxes, such as:

Answer 14

• Payroll taxes
• Excise taxes
• Franchise taxes payable to state and local governments
• Penalties, such as late filing penalties

Question 15

The tax rate in excess net passive income is 21% (the highest corporate rate) and is applied against the lesser of:

Answer 15

• Excess net passive income
• Taxable income figured as though the corporation were a C corporation

Question 16

The built-in gains (BIG) tax only applies to the following S corporations:

Answer 16

• An S corporation that was a C corporation before it elected to be an S corporation
• AN S corporation that acquired an asset with a basis determined by reference to its basis (or the basis of any other property) in the hands of a C corporation (a transferred-basis acquisition)

Question 17

The built-in gains tax applies only affects property dispositions during the five years beginning:

Answer 17

• On the first day of the first tax year in which the corporation is an S corporation, for an asset held when the S corporation was a C corporation
• On the date the asset was acquired by the S corporation, for an assert with a basis determined by reference to its basis in the hands of a C corporation