Anita Sayyed, Thomas Labelle, Sravya Boddu, Brian Reynolds

Chapter 5: Taxing Corporate Distributions

Learning Objectives (Review)• LO. 1: Explain the role that earnings and profits play in

determining the tax treatment of distributions

• LO.3: Determine taxable dividends paid during the year by correctly allocating current and accumulated E & P to corporate distributions

RECAPAccumulated Current

E&P E&P•Current 1st pro rata, accumulated

chronological as necessary

•Netted at the date of distribution

•Do NOT net! Dividend income to the extent of current positive balance

•No dividend income, results in return of capital or capital gain

Learning Objectives (New)LO.4: Describe the tax treatment of dividends for individual

shareholders

LO.5: Evaluate the tax impact of property dividends by computing the shareholder’s dividend income, basis in the property received, and the effect on the distributing corporation's E & P and taxable income

LO 4: Tax Treatment of DividendsCorporations:Dividend income for corporations is ordinary income and they receive dividend received deductions.

• Ownership less than 20% 70% exempt• Ownership 20%-50% 80% exempt• Ownership more than 50% 100% exempt

Individuals:Individuals are taxed at lower preferential rates for qualified dividends.• Individuals paying tax @ 10-15% 0%• Individuals paying tax @ 39.6% 20%• For any other tax bracket 15%

LO 4: Tax Treatment of Dividends

LO 4: Tax Treatment of DividendsQualified dividends:• Paid by domestic or qualified /approved corp.• Short or long positions do NOT qualify• Stock held more than 60 days during the 121 days period

▫ 60 days begins before the before ex-dividend date ▫Ex-Dividend date: 2 days before the declaration of dividend

• Example 2

LO 5: Property DividendsReasons for Property Distribution:• Shareholders may want a particular property

• Company low on cash reserves may want to distribute dividends to shareholders

(Property distributions are taxed on the same rates as cash dividend)

EFFECT ON SHAREHOLDER:

• The amount distributed is the FMV of the property distributed reduced by any liability that the property is subject to or any liability of the corporation that the shareholder assumes.

• Example 3

LO 5: Property Dividends

EFFECT on CORPORATION:

• The distribution of property is treated as sale/exchange of property at its FMV. Corporations recognize gain on distribution (FMV-Basis)

• If a loss is realized it will not be recognized on the tax return. (to avoid negative dividend)

• Example 4

LO 5: Property Dividends

EFFECT ON SHAREHOLDER:• Distribution covered by E&P is treated as dividend and the

excess is treated as return of capital. The amount of return greater than shareholder’s basis is taxed as capital gain

• The FMV of the property received as dividend will be the basis of the property for the shareholder.

• Example 5

LO 5: Property Dividends• If the liability assumed is greater than the corporation’s basis

in the property, The FMV is deemed not to be less than the liability. The shareholder’s basis in the property will be the FMV of the liability

• Example 6

LO 5: Property Dividends• Corporate distributions reduce the E&P by the amount of

money distributed. (assuming enough basis)

Or by greater of FMV or adjusted basis of property distributed

Less: the amount of any liability assumed

• E&P will increase by any gain recognized on distribution of property

• Examples 7, 8, 9

LO 5: Property Dividends• A distribution of cash or property cannot generate a

deficit or add to a deficit in E&P. Deficits can arise only through corporate losses.

• Example 10

RECAPEFFECT ON CORPORATION EFFECT ON SHAREHOLDER

FMV > Basis Distribution=FMVGain is recognized

Distribution=FMVBasis=FMV

FMV < Basis Distribution= Basisloss is not recognized

Distribution =FMVBasis=FMV

FMV > BasisLiability is assumed

Distribution=FMV - Liab assumedGain is recognized

Distribution=FMV-LiabilityBasis=FMV

Liability>FMV deemed FMV=liability assumedDistribution = greater of FMV or BasisGain if any is recognized

deemed FMV=LiabilityDistribution=FMV-LiabilityBasis=FMV