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Assignments

Assignments. For next class: Read Chapter 5, pages 1 through top of page 16. 4. Chapter. Corporate Nonliquidating Distributions. Problems. Property Distributions: C4-33, C4-34, C4-35, C4-37. Constructive Dividends.

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Assignments

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  1. Assignments • For next class: • Read Chapter 5, pages 1 through top of page 16

  2. 4 Chapter Corporate Nonliquidating Distributions

  3. Problems • Property Distributions:C4-33, C4-34, C4-35, C4-37

  4. Constructive Dividends • Constructive dividends are payments made to or other benefits received by shareholders that are not initially declared as being dividends but are recharacterized as dividends by the IRS

  5. Constructive Dividends • Examples: • Excessive compensation payments • Excessive payments for use of property • Loans that are not bona fide • Payments of shareholders’ personal expenses • Personal use of corporate property • Bargain purchase of corporate property

  6. Example 7 – Constructive Dividends • Bad Corporation pays $150,000 per year in rent to its sole shareholder for use of business property. The IRS determines that a fair rental payment would be $90,000 per year. • Bad Corporation’s taxable income increases by $60,000 per year (considered a dividend paid) • Shareholder’s rental income decreases and dividend income increases by $60,000 per year • Problem: C4-38

  7. C corporations Distributions of Stock and Stock Rights

  8. Taxation of Shareholders • [IRC §305(a)] Gross income does not include distributions of the distributing corporation’s stock or stock rights received by shareholders with respect to their stock

  9. Taxation of Shareholders • Exceptions: • Distributions in lieu of money [IRC §305(b)(1)] • Disproportionate distributions [IRC §305(b)(2)] • Distributions of common stock to some shareholders and preferred stock to others [IRC §305(b)(3)] • Distributions on preferred stock unless change in conversion ratio after common stock dividend or stock split [IRC §305(b)(4)] • Distributions of convertible preferred stock unless no disporportionate effect [IRC §305(b)(5)]

  10. Taxation of Shareholders • [IRC §307(a), Reg. §1.307-1, & Reg. §1.307-2] If a nontaxable stock dividend is received, the basis of the stock is allocated between the old and new shares • If shares are identical, basis is divided evenly • If not, basis is allocated based on relative FMVs

  11. Taxation of Shareholders • [IRC §307(b)] If nontaxable stock rights are received and the FMV of the stock rights is at least 15% of the FMV of the stock, the basis is allocated between the old stock and the stock rights on the basis of relative FMVs • If the stock rights lapse, the basis is added back to the basis of the stock [Reg. §1.307-1(b)] • If the stock rights are exercised, the basis of the stock rights is added to the basis of the new stock [Reg. §1.307-1(b)]

  12. Taxation of Shareholders • [IRC §307(b)] If nontaxable stock rights are received and the FMV of the stock rights is less than 15% of the FMV of the stock, the basis of the stock rights is zero • Shareholder can elect to allocate basis based on relative FMVs

  13. Taxation of C Corporation • [IRC §311(a)(1)] A corporation recognizes no gain or loss on the distribution of its own stock or stock rights to its shareholders with respect to its already outstanding stock • [IRC §312(d)(1)] Nontaxable distributions do not reduce current or accumulated E&P

  14. Taxable Distributions • Distributions of a corporation’s own stock or stock rights that are taxable (due to one of the five exceptions), are treated like any other corporate distribution of property

  15. Examples • Problems: C4-40, C4-41, C4-42

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