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Property Distributions Tx 8120. Things to Achieve 1.Define _________, 2.Explain the effect of property distributions on _____________ and ______________,

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Presentation on theme: "Property Distributions Tx 8120. Things to Achieve 1.Define _________, 2.Explain the effect of property distributions on _____________ and ______________,"— Presentation transcript:

1 Property Distributions Tx 8120

2 Things to Achieve 1.Define _________, 2.Explain the effect of property distributions on _____________ and ______________, 3.Identify ______________ dividends, and 4.Determine how much ____ is available for a given distribution. You should be able to:

3 Non-Liquidating Distributions Shareholders Corporation Shareholders Corporation Shareholders Corporation Property DistributionStock DistributionStock Redemption 1.How much _____ or _____ do shareholders recognize? 2.What ______ do shareholders take in property received? 3.When does the _________ period begin in property received? 1.How much gain or loss does the corporation __________? 2.How is the corporation’s _____ affected? Shareholder ( ) IssuesCorporation ( ) Issues

4 Section 317(a) (a) Property. For purposes of this part, the term “property” means money, securities, and any other property; except that such term does not include stock in the corporation making the distribution (or rights to acquire such stock). Shareholders Corporation Property Property includes: (1) Cash and most other assets (2) in any corporation (3) in any corporation (other than )

5 Section 301(a) (a) In general. Except as otherwise provided in this chapter, a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c). Shareholders Corporation Property Shareholder issues Gain or loss recognized

6 Section 301(c)(1) (c) Amount taxable. In the case of a distribution to which subsection (a) applies-- Shareholders Corporation Property (1) Amount constituting dividend. That portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income. Shareholder issues Gain or loss recognized

7 Section 316(a) (a) General rule. For purposes of this subtitle, the term “dividend” means any distribution of property made by a corporation to its shareholders-- Shareholders Corporation Property (1) out of its earnings and profits accumulated …, or (2) out of its earnings and profits of the taxable year …. Shareholder issues Gain or loss recognized

8 Section 301(c)(2) (c) Amount taxable. In the case of a distribution to which subsection (a) applies-- Shareholders Corporation Property (2) Amount applied against basis. That portion of the distribution which is not a dividend shall be applied against and reduce the adjusted basis of the stock. Shareholder issues Gain or loss recognized

9 Section 301(c)(3) (c) Amount taxable. In the case of a distribution to which subsection (a) applies-- Shareholders Corporation Property (3) Amount in excess of basis. (A) [T]hat portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock, shall be treated as gain from the sale or exchange of property. Shareholder issues Gain or loss recognized

10 Summary: Shareholder’s Income Shareholders Corporation Property Amount of Property Distribution _____ ______ to extent of corporation’s E&P _______ gain for any _______ amount _______ of capital to extent of stock _____ Shareholder issues Gain or loss recognized

11 Section 301(b) (b) Amount distributed. Shareholders Corporation Property (1) General rule. For purposes of this section, the amount of any distribution shall be the amount of money received, plus the fair market value of the other property received. (2) Reduction for liabilities. The amount of any distribution determined under paragraph (1) shall be reduced (but not below zero) by-- (A) The amount of any liability of the corporation assumed by the shareholder in connection with the distribution, and (B) The amount of any liability to which the property received by the shareholder is subject immediately before, and immediately after, the distribution. Shareholder issues Gain or loss recognized

12 Section 301(d) (d) Basis. The basis of property received in a distribution to which subsection (a) applies shall be the fair market value of such property. Shareholders Corporation Property Shareholder issues Basis of property received

13 Section 1223(2) Shareholders Corporation Property Shareholder issues Holding period of property received For purposes of this subtitle-- (2) In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under this chapter such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.

14 Section 311(a) (a) General rule. Except as provided in subsection (b), no gain or loss shall be recognized to a corporation on the distribution (not in complete liquidation) with respect to its stock of-- (1) its stock (or rights to acquire its stock), or (2) property. Shareholders Corporation Property Corporate issues Gain or loss recognized

15 Distributing Loss Property Corporate issues Gain or loss recognized How much loss does the corporation recognize? What basis does the shareholder take in the property? What would you advise the corporation to do? Shareholder Corporation (E&P $10,000) Property:FMV Basis

16 Section 311(b) (b) Distributions of appreciated property. (1) In general. If-- Shareholders Corporation Property (A) a corporation distributes property (other than an obligation of such corporation) to a shareholder in a distribution to which subpart A applies, and (B) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation), then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market price. Corporate issues Gain or loss recognized

17 Section 311(b) (b) Distributions of appreciated property. Shareholders Corporation Property Corporate issues Gain or loss recognized (1)In general. … (2)Treatment of liabilities. Rules similar to the rules of section 336(b) shall apply for purposes of this subsection. Corporation’s ______ ________ is the greater of property’s ____ or distributed __________.

18 Distributing Liabilities Corporate issues Gain or loss recognized Shareholder Corporation (E&P $20,000) Property:FMV Basis Liability How much gain does the corporation recognize? What basis does the shareholder take in the property? What happens to the additional $______ “paid” for the property?

19 Earnings and Profits Increased for ____ recognized on appreciated property –Recognized if ___ > adjusted basis, §311(b)(1) –Reflected in ________ income Decreased for ________ of ____ or adjusted basis, §312(a)(3), (b)(2) Property distributions cannot _____ or ___ to an E&P deficit. Shareholders Corporation Property Corporate issues E&P impact

20 Impact Is Identical Shareholders Corporation FMV $ Basis Corporate issues E&P impact Appreciated PropertyDepreciated Property E&P Impact from Distribution: Increased for $___ recognized gain, §311(b)(1) Decreased for $___ FMV, §312(b)(2) E&P Impact If Sold and Proceeds Distributed: Increased for $___ recognized gain, §1001(c) Decreased for distribution of $___ proceeds, §312(a)(1) Shareholders Corporation FMV $ Basis E&P Impact from Distribution: ___ effect from unrecognized loss, §311(a)(2) Decreased for $___ basis, §312(a)(3) E&P Impact If Sold and Proceeds Distributed: Decreased for $___ recognized loss, §1001(c) Decreased for distribution of $___ proceeds, §312(a)(1)

21 Appreciated Property Distribution What is the distribution’s effect on the shareholder? How much gain or loss does the corporation recognize? How does the distribution affect E&P? Sole Shareholder Corporation (CE&P $3,000; no AE&P) Property:FMV $ Basis Basis $

22 Earnings and Profits (continued) _________ for liabilities shareholder ________ or takes property subject to, §312(c) _________ for _________ amount of corporation’s own obligations (or issue price if ____), §312(a)(2) Shareholders Corporation Property Corporate issues E&P impact

23 Original Issue Discount Shareholder Y Corporation (E&P $800,000) 30-year, 1% Y bonds:Face value$800,000 FMV (issue price)250, % How much gain or loss does the shareholder recognize? What basis does the shareholder take in the Y bonds? How much gain or loss does the corporation recognize? How does the distribution affect E&P?

24 Constructive Dividends Preceding rules apply only to property a corporation pays to its shareholder with respect to its _____, §301(a). Don’t apply to shareholders who receive: –Compensation as an _________, –Interest or principal as a _______, –Rent as a _______, –Royalties as a _______, or –Invoice amounts as a _______.

25 Constructive Dividends (continued) Closely-held corporations may be _____ ____ of shareholders. –____ may chair the board of directors. –However, dividends can occur without board formally __________ dividends. Constructive dividends are treated the same as _______ dividends. –___ corporate deduction and –Reduces ____

26 Constructive Dividends (Taxonomy) Avoiding _________-level tax: –Shareholder _____ corporate property for free –Corporate ______ to shareholder –Shareholder receives ___-_________ loan –_______ purchase of shareholder Avoiding _______-level tax: –Excessive rent paid to shareholder-_____ –Excessive __________ paid to shareholder-employee –Excessive ________ paid to shareholder-licensor –Excessive purchase price paid to shareholder-_______ –Excessive _________ paid to shareholder-creditor Avoiding tax at both levels

27 Corporate Loan to Shareholder Shareholder Corporation (E&P $400,000) $300,000 no- interest loan 100% Constructive dividends Shareholder-creditor Interest _______ at semiannually-compounded Federal rate, §7872. Shareholder deducts interest “paid” unless: Loan proceeds used for _________ purposes per §163(h), Interest > net ____________ income per §163(d), or Proceeds used to acquire or carry tax-exempt securities, §265(a)(2). Corporation has ______ _______ for interest “received.” Corporation “returns” interest to shareholder as a _________ ________. Shareholder recognizes gross income for __________ “received.” Results (assuming maximum rates): (a) Corporate-level ___%, (b) Shareholder-level ___%, and (c) Possible shareholder ___%.

28 _______ approves written compensation policy __________ reasons for high salary Bonuses tied to _______, not taxable income _________ dividends (even if low) Shareholder-employee compensation not ___________ to stock held Formalize ______ agreement Avoiding “Excessive Salary” Constructive dividends Shareholder-employee

29 Nicholls, North, Buse Co. v. CIR (TC, 1971) Mom and Dad owned all _____ shares, while sons owned some nonvoting stock. The corporation bought a yacht and used it for business 25% of the time. A son logged most of the _______ use. Since Dad controlled the voting shares and acted as president, the court attributed a constructive dividend to him (rather than his son) for the personal use. Opting not to treat the ______ _____ as a dividend since the corporation still held title, the court measured the dividend as 75% of the yacht’s full ______ ______. Constructive dividends Shareholder-employee

30 Constructive dividends Bargain sale Rev. Rul A X Corp 100% Y Corp 100% A X Corp Result of §482 Reallocation Y Corp Actual Transaction 100% (_______ gross income)(________ property’s basis)

31 E&P Pools Current E&P Accumulated E&P Shareholders Corporation Property Complicating Factors: 1._______ in one or both pools 2.________ but insufficient E&P 3.________ distributions during year 4.Distributions before _____ known 5.Change in ________ during year

32 Section 316(a) (a) General rule. For purposes of this subtitle, the term “dividend” means any distribution of property made by a corporation to its shareholders-- Shareholders Corporation Property (1) out of its earnings and profits accumulated …, or (2) out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made. Except as otherwise provided in this subtitle, every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits ….

33 Reg. § (b) (b) … If the distributions made during the taxable year … exceed the earnings and profits of such year, then that proportion of each distribution which the total of the earnings and profits of the year bears to the total distributions made during the year shall be regarded as out of earnings and profits of the year. … Shareholders Corporation Property Unless shareholders can demonstrate otherwise before their filing date that CE&P is _______, CE&P is presumed ________. If CE&P later proves to be _________, shareholders amend their returns.

34 Reg. § (b) (b) … In any case in which it is necessary to determine the amount of earnings and profits accumulated …, and the actual earnings and profits to the date of the distribution within any taxable year cannot be shown, the earnings and profits for the year … in which the distribution was made shall be prorated to the date of the distribution …. Shareholders Corporation Property

35 E&P Sourcing Rules Distributions come from ____ _________ accumulated E&P Compute _____ at yearend. Shareholders treat all distributions as dividends if: Shareholders Corporation Property –CE&P ≥ _________ distributions or –_____ + _____ ≥ current distributions. If both CE&P and AE&P show ________, shareholders treat all distributions as returns of capital and then capital gains.

36 E&P Sourcing Rules (continued) If CE&P is ______ but < current distributions and ______ is insufficient to make up the short fall: –_______ CE&P among distributions and –Allocate AE&P to distributions on ____ basis. Shareholders Corporation Property

37 E&P Sourcing Rules (continued) Shareholders Corporation Property If CE&P is ______ and AE&P is ______: –Prorate current ______ based on when the distribution occurs, –Reduce _____ by this prorated deficit, and –Apply AE&P to each distribution on ____ basis.

38 Rev. Rul (Situation #1) Shareholders X Corporation Deficit (1st half)$-50,000 CE&P (2nd half) 55,000 CE&P (year)$ 5,000 AE&P40,000 $15,000 distribution at year’s midpoint 100% Dividend from CE&P Dividend from AE&P Total dividend Effect on Shareholders AE&P at year’s start CE&P Dividend from E&P AE&P at yearend Effect on X Corporation

39 Rev. Rul (Situation #2) Shareholders Y Corporation CE&P (1st half)$75,000 Deficit (2nd half) -70,000 CE&P (year)$ 5,000 Accumulated deficit-60,000 $15,000 distribution at year’s midpoint 100% Dividend from CE&P Return of capital (or gain) Total distribution Effect on Shareholders AE&P at year’s start CE&P Dividend from CE&P Accumulated deficit at yearend Effect on X Corporation

40 Rev. Rul (Situation #3) Shareholders X Corporation Current deficit$-5,000 AE&P40,000 $15,000 distribution at year’s midpoint 100% AE&P at year’s start Current deficit at midpoint Available for dividends Dividend from AE&P Current deficit after midpoint AE&P at yearend Effect on X Corporation

41 Rev. Rul (Situation #4) Shareholders X Corporation Current deficit$-55,000 AE&P40,000 $15,000 distribution at year’s midpoint 100% AE&P at year’s start Current deficit at midpoint Available for dividends Dividend from AE&P Current deficit after midpoint Accumulated deficit at yearend Effect on X Corporation

42 Ann Pelican Corporation CE&P$ 5,000 AE&P0 $17, % ($10,000 basis) Effect on Ann Lind et al., pp part (a) Effect on Pelican Corp Dividend from E&P Reduction in Ann’s stock basis Ann’s capital gain Total distribution Beginning E&P CE&P Dividend Ending E&P

43 Ann Pelican Corporation CE&P$10,000 Accumulated deficit-15,000 $10, % ($10,000 basis) Lind et al., pp part (b) Effect on Ann Effect on Pelican Corp Dividend from CE&P Beginning deficit CE&P Dividend from CE&P Ending deficit

44 Ann Pelican Corporation CE&P$ 4,000 AE&P10,000 $10,000 Lind et al., pp part (c) 100% ($10,000 basis) Baker Corp $5,000 50% of shares (basis $5,000) $15,000 Oct. 1 Apr. 1 July 1 Effect on Ann Effect on Pelican Corp Effect on Baker Corp Dividend from CE&P (Apr. 1) Dividend from CE&P (Oct. 1) Beginning E&P CE&P Dividend from CE&P Dividend from AE&P Ending E&P Dividend from CE&P (Oct. 1) Step 1:Allocate $4,000 CE&P ___ ____ to $10,000 dividend on Apr. 1 and $10,000 dividend on Oct. 1 Dividend from AE&P (Apr. 1) Dividend from AE&P (Oct. 1) Return of capital (Oct. 1) Stock basis declines to $ Return of capital (Oct. 1) Stock basis declines to $ Step 2:Allocate $10,000 AE&P to Apr. 1 distribution ______

45 Ann Pelican Corporation Current deficit$-10,000 AE&P10,000 $10,000 Lind et al., pp part (d) 100% ($10,000 basis) Baker Corp $5,000 50% of shares (basis $3,750) $15,000 Oct. 1 Apr. 1 July 1 Effect on Ann Effect on Pelican Corp Effect on Baker Corp Dividend from AE&P (Apr. 1) Beginning E&P Dividend from AE&P Current deficit Ending deficit Step 1:Calculate E&P available on April 1 Return of capital (Apr. 1) Return of capital (Oct. 1) Capital gain (Oct. 1) Return of capital (Oct. 1) Stock basis declines to $ Step 2:The April 1 return of capital reduces Ann’s stock basis to $______.


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