Chapter 15

Corporate Nonliquidating Distributions

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Dividend Distsributions

Dividend to the extent of the corporation’s current and accumulated E&P.

Dividends in excess of E&P are returns of capital – reduce shareholder basis.

Once basis=0, then gain on sale.

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Earnings and Profits

E&P is computed annually Not defined by IRC, but adjustments

to and from taxable income. (pg 15-4 through 15-5)

Distributions from current E&P first, then from accumulated E&P

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E&P (cont’d)

Distributions<current E&P, then dividends, even if accum E&P<0

Distributions>current E&P, but not greater then sum ofcurrent and accum, then:

Current E&P/Total dist = % dist If distribution is greater than E&P available, then

return of capital based on %.

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Property Distributions – S/H

FMV at date of distribution If liability attached, then FMV-liability. Dividend income to extent of E&P. S/H basis in the property is FMV, and holding

period is as of date of distribution.

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Property Distributions – Corp

Corporation recognizes gain equal to FMV-AB

Losses are not recognized. No gain or loss if distributes its own stocks. If property encumbered by a liability, then for

gain calculations, FMV = greater of FMV or liability.

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Property Distributions – Corp (cont’d)

E&P is reduced by AB. If appreciated property is distributed, then

E&P is increased by appreciation, then decreased by FMV.

Decrease in E&P by the property’s AB or FMV, is reduced by liability on property.

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Constructive dividends

Unreasonable compensation Corporate payment of shareholder responsibilities Shareholder loans Corporate loans Free personal use of corporate property Bargain sales/rentals to shareholders Premium sales/rentals to the corporation

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Stock Dividends – Non Taxable

Proportionate stock sales are not taxable. Shares in NT dividend take on holding period

of original shares. E&P is not reduced.

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Stock Dividends –Taxable

Taxable if there is an option of stock or property

Disproportionate distributions Some receive common/some preferred Distributions on preferred stock Distribution of convertible preferred stock

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Stock Dividends –Taxable

S/H dividends (to extent of E&P) is stock’s FMV.

Basis of stock is FMV on distribution date. Holding period as of distribution date. E&P is reduced by FMV of stock.

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Stock Redemptions

Sale or exchange treatment if Section 302/303 requirements met (page 15-22).

Sale or exchange is preferential b/c return of capital and potential capital gain, not a dividend.

Constructive ownership – attribution (family members, partners, corporations with >=50% ownership

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Stock redemptions

302(b)(1) – exchange treatment id redemption is not essentially a dividend.

Vague test – BUT interpreted to mean there must be a meaningful reduction in s/h interest. (i.e., a loss of controlling interest).

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Stock redemptions

302(b)(2) – 3 mechanical tests if met, assure exchange treatment.After redemption, s/h owns less than 50% S/H proportionate interest must be 80% less

than before redemption

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Stock redemptions

302(b)(3) – Complete termination of s/h interest Family attribution can be waived if s/h signs

agreement to sever all ties for 10 years. S/H can be a creditor and can be an owner again if

stock is inherited.

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Stock redemptions

302(b)(4) – determined at corporate level, not s/h. If distribution is considered a partial liquidation, then it will be exchange treatment.

Corporation must cease to conduct its trade or business, or have contracted the business.

Conduct a new trade or business. Must have been active 5 years before the

distribution

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Stock redemptions

303 – Redemptions of stock to pay a s/h’s federal and state death taxes, funeral and administrative expenses receive gain treatment.

Some criteria must be met.

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Tax Consequences - Corporation

Costs incurred by a corp in redeeming its stock must be capitalized and not amortized.

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