Stock Redemptions
If Corp A is owned by Bob (60 shares) and Tom (40 shares). Would a stock redemption of 30 shares from Bob be considered a Distribution Substantially disproportionate in terms of shareholder effect? Yes or No
Yes. Bob drops from 60% (60/100) to 42% (30/70). 80% of 60% = 48 shares. So he has less than 80% of the shares he originally had and less than 50% stock and voting rights.
Accumulated E&P is the same as Retained Earnings. True or False
False - they are similar but not exactly the same
What are the 3 requirements for Section 351?
1. Property is transferred
2. In exchange for stock
3. The property transferors are in control of the corporation immediately after the exchange
$21,000
What is an M-3?
How is current E&P (either positive or negative) allocated throughout the year?
Ratably
What does E&P stand for and what does it measure?
Earnings & Profits - It measures the firms accumulated capital or the earnings the corporation has to distribute to shareholders through dividends
Paul contributes property with a FMV of $40,000, basis of $15,000 in exchange for 15% of the shares of Company X. What is Paul's recognized gain on this transfer?
$40,000 - 15,000 = $25,000
Sec. 351 doesn't apply because 80% control is not obtained
What is meant by there being double taxation on corporations?
Corporations pay tax on their earnings and shareholders pay tax on their distributions from the corporation. The distributions are not deductible from income
What is an M-2?
A schedule that reconciles beginning unappropriated retained earnings with ending appropriated retained earnings.
When considering stock attribution rules for stock redemption, who are qualified family members?
Section 318 governs this. Spouse, children, grandchildren and partents
How is a distribution from E&P taxed?
As a dividend
Larry transfers property, basis of $100,000 FMV of $120,000 to a corporation in exchange for 80% of their stock (FMV $115,000) and $5,000. What gain, if any, does Larry recognize on the transfer?
The lesser of
gain realized, $20,000, or
boot received, $5,000
So Larry recognizes $5,000 of gain
How is the accumulated earnings tax avoided?
By distributing sufficient dividends
What is the formula for determining Shareholder's basis in stock when received in exchange of property?
Adjusted basis of property
Plus Gain Recognized
Minus Boot Received
Minus Adjustment for loss property if elected
=Basis of Stock Received
What are the 4 types of stock redemptions that qualfy for sale or exchange treatment?
1. Distributions not essentially equivalent to a dividend
2. Distributions substantially disproportionate in terms of shareholder effect
3. Distributions in complete termination of a shareholder’s interest
4. Distributions to pay a shareholder’s death taxes
When is a corporate distribution treated as a capital gain by the shareholder?
When the distribution is in excess of E&P, and the distribution is in excess of the shareholder's basis.
Tonya transfers property to ADA Inc. worth $600,000, basis of $200,000 and receives 80% of the stock (FMV $500,000) of ADA Inc. and $100,000 cash. How much, if any, gain does Tonya recognize on the transfer? And what is the basis of the property to ADA Inc.?
$100,000 off gain
ADA's basis is $200,000 + $100,000 = $300,000
What are the requirements for a dividend to be considered qualified?
1. Domestic or Qualified foreign corp
2. Shareholders with both short and long term positions do not qualify
3. Stock on which dividend was paid must be held for 60 during the 121 days beginning 60 days before the ex-dividend date and ending 60 days after the ex-dividend date.
What is the formula for the Corporation's Basis in the property that a corporation received in exchange for stock?
Adjusted basis of property transferred
+ Gain recognized by transferor/shareholder
- Adjustment for loss property (if elected)
= Basis of Property to Corporation
What are the 2 requirements for family attribution rules to not apply when there is a complete termination of stock through a redemption?
1. Former shareholder does not acquire any interest in the corporation for 10 years after the redemption
and
2. Former shareholder files an agreement to notify IRS of any prohibited acquired interest within the 10 year postredemption period.
When current E&P is negative and Accumulated E&P is positive, what is the process for determining how the distribution is taxed?
Current E&P is netted with Accumulated E&P on a pro-rata basis and then the distribution is taken from Accumulated until it is depleted.
Sara transfers land with a basis of $75,000, fair market value of $300,000 to a corporation in exchange for 100% of their stock. The land is subject to a mortgage of $10,000 that the corporation assumes. What is the Sara's recognized gain, basis in her stock and the corporation's basis in the land?
Sara's gain = $0
Sara's basis in the stock = $75,000 - 10,000 = $65,000
Corp's basis in the land = $75,000
Yellow Inc. sells residential real estate for $1,000,000. It was originally purchased for $600,000 and now has a basis of $450,000. How much of the gain is recognized as ordinary income under Section 291?
$600,000 - 450,000 = 150,000
150,000 * 20% = $30,000
Determine the Dividend Received Deduction:
Income from Operations: $32,000
Expenses from Operations: $40,000
Dividend from a 10% owned company $10,000
10,000 * 50% = 5,000
2,000 * 50% = 1,000
Because #1 produces a net loss, use #1, $5,000