Ch. 14

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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