Ch. 14

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Ch. 15 - Corporate non-liquidating distributions o After distribution corporation still exists, does not liquidate - SS 312 Earnings and Profits o Economic income o Taxable income and go back and ask yourself was it an actual loss, did I lose the money o Accumulated earnings and profits ▪ Every year you have a current year E+P and it will roll forward o Steps ▪ E + P allocation ▪ Take from Basis ▪ If exceed Basis = Captial gain - SS 301 Distribution o Question on exam o Distribute cash o What is the shareholders tax? o Likely a dividend o To the extent you have E + P the distribution is taxed as a dividend o If distributions exceeds E + P and you have basis in corporation = ROC (return on capital) o ROC is taxed free o Basis = ROC o Excess = gain - SS 311 Property Distribution o Question on Exam ▪ General utility problems o Instead of distributing cash you distribute car, building, real-estate o General Utilities Doctrine ▪ Distribute property up to shareholders ▪ Don't sell, distribute instead ▪ Before SS311 • If you liquidate company, you don't have to pay taxes • Advice would be to liquidate company • If congress offers tax loopholes, you take it ▪ SS 311 if the fair market value and the basis are equal and you make a property distribution, no gain at the corporate level • Does the corporation owe taxes? • If the fair market value is less than the basis, corporation makes a distribution, corporation cannot claim a loss o Do not distribute because then you lose loss o You should take the loss in order to pay less taxes o Take the loss and then distribute the cash
• If the fair market value is greater than the basis, the corporation has to pay tax on the gain. Pays taxes based on difference between fair market value and basis - Constructive Dividends o Regulatory/case law o Constructive: something is considered to happen for tax purposes only ▪ Tax code says you did something even though you didn't o Corp pays SH debt ▪ SH received a constructive dividend o Corp pays premium on SH life insurance ▪ Corp beneficiary = no constructive dividend ▪ Money goes to SH's spouse and children = constructive dividend o 4 owners one dies ▪ Shares go to spouse ▪ Spouse wants to get paid out ▪ Solution: life insurance for SH and make the corporation the beneficiary ▪ This is because they don't have money laying around o You can make loans, need contract (a promissory note) and need to pay interest ▪ If not, will be considered a constructive dividend ▪ Interest rate needs to be a number where you could go out and get that rate - SS 305/307 Stock Distributions/Splits o Corporations may distribute more stocks or rights ▪ Own same percentage as before distribution ▪ Everyone receives the same amount ▪ If you own the same amount of percentage of stock before and after • Not taxable ▪ If you own more after • It is taxable - SS 302 Redemptions o If a corporation is redeeming its own stock in exchange for money o Bought back own stock o Have to have a code section to tell us it's a redemption o If meet one of five test, given exchange treatment o If you don't meet one of five tests, not given exchange treatment o Five tests (know 1-3) ▪ Test one = redemptions not equivalent to dividends • Everyone just said not a dividend • Was there a meaningful reduction o Voting power o Own less than 50% o Went from owning 100% to 99% = not meaningful o Went from owning 51% to 49% = meaningful reduction • Don't use if you don't have too ▪ Test two = substantially disproportionate redemption of stock
• Gives percentages • SH must own less than 50% of the outstanding voting stock and have to own less than 80% of what they owned before • Watch video (Instagram) • Recommend using this test o Gives a mechanical answer ▪ Test three = termination of shareholder's interest • Liquidate position • SS 302 c 2 A - Owe taxes if you violate 10 year rule • Only a duck if the tax code tells us • SS 318 applies ▪ Test four = ▪ Test five = Normal clients = don't do test five o Basis recovery ▪ Paid 100 sold for 130, 30 is gain and recovered 100 ▪ The full 130 is not taxable ▪ If you don't meet one of five test, 130 goes to SS301 and the full amount is taxable as a dividend - SS 304 Redemptions through related corporations o Question on Exam (one question) o Something happened but for tax purpose recast as something else o Section 1001 gain/loss if 304 did not exist o If 304 applies, do not treat as sale, recasts the whole thing under the rules o Instead of a sale, we are going to consider, section 351 contribution was made from X to Y for a figtition share (ghost share), Y then send s up a distribution "redeeming" the share o A received a contribution from Y o Distribution tax effect ▪ To the extent that the acquiror (Y) has E+P = Dividend ▪ To the extent that the acquired (X) has E+P = Dividend • Have to look at both corps E+P ▪ To the extent the distribution exceeds acquiror and acquired E+P = ROC (basis) (from the acquiror) ▪ Any excess = capital gain o Check list (need to meet all requirements) ▪ Corps involved in the transactions ▪ Have to have one overarching entity in control • Have to be 50% owned by a common owner • Main parent entity have control over entities below it ▪ A sale has occur • Sale of one corporation to another o Why would you purposely trigger 304? ▪ If you sell x to y, the character is a capital gain (can only offset with capital loss) ▪ Day traders = ordinary gain
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