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Property Distributions Tx 8120

Property Distributions Tx 8120. Things to Achieve. Define _________, Explain the effect of property distributions on _____________ and ______________, Identify ______________ dividends, and Determine how much ____ is available for a given distribution. You should be able to:.

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Property Distributions Tx 8120

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  1. Property DistributionsTx 8120

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

  3. Non-Liquidating Distributions Property Distribution Stock Distribution Stock Redemption Shareholders Shareholders Shareholders Corporation Corporation Corporation Shareholder ( ) Issues Corporation ( ) Issues 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?

  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). Property includes: (1) Cash and most other assets (2) in any corporation (3) in any corporation (other than ) Shareholders Property Corporation

  5. Shareholder issues Gain or loss recognized 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 Property Corporation

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

  7. Shareholder issues Gain or loss recognized 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-- (1) out of its earnings and profits accumulated …, or (2) out of its earnings and profits of the taxable year …. Shareholders Property Corporation

  8. Shareholder issues Gain or loss recognized Section 301(c)(2) (c) Amount taxable. In the case of a distribution to which subsection (a) applies-- (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. Shareholders Property Corporation

  9. Shareholder issues Gain or loss recognized Section 301(c)(3) (c) Amount taxable. In the case of a distribution to which subsection (a) applies-- (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. Shareholders Property Corporation

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

  11. Shareholder issues Gain or loss recognized Section 301(b) (b) Amount distributed. (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. Shareholders Property Corporation

  12. Shareholder issues Basis of property received 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 Property Corporation

  13. Shareholder issues Holding period of property received Section 1223(2) 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. Shareholders Property Corporation

  14. Corporate issues Gain or loss recognized 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 Property Corporation

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

  16. Corporate issues Gain or loss recognized Section 311(b) (b) Distributions of appreciated property. (1) In general. If-- (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), Shareholders then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market price. Property Corporation

  17. Corporate issues Gain or loss recognized Section 311(b) (b) Distributions of appreciated property. • 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 __________. Shareholders Property Corporation

  18. Corporate issues Gain or loss recognized Distributing Liabilities Shareholder Property: FMV Basis Liability Corporation (E&P $20,000) 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. Corporate issues E&P impact 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 Property Corporation

  20. Corporate issues E&P impact Impact Is Identical Appreciated Property Depreciated Property Shareholders Shareholders FMV $ Basis FMV $ Basis Corporation Corporation 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) 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 How much gain or loss does the corporation recognize? How does the distribution affect E&P? What is the distribution’s effect on the shareholder? Sole Shareholder Basis $ Property: FMV $ Basis Corporation (CE&P $3,000; no AE&P)

  22. Corporate issues E&P impact 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 Property Corporation

  23. Original Issue Discount Shareholder 100% 30-year, 1% Y bonds: Face value $800,000 FMV (issue price) 250,000 Y Corporation (E&P $800,000) 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. Constructive dividends Shareholder-creditor Corporate Loan to Shareholder 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.” Shareholder 100% $300,000 no-interest loan Results (assuming maximum rates): (a)Corporate-level tax @ ___%, (b) Shareholder-level tax @ ___%, and (c) Possible shareholder deduction @ ___%. Corporation (E&P $400,000)

  28. Constructive dividends Shareholder-employee Avoiding “Excessive Salary” • _______ 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

  29. Constructive dividends Shareholder-employee 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 ______ ______.

  30. Constructive dividends Bargain sale Rev. Rul. 69-630 Actual Transaction Result of §482 Reallocation A A 100% 100% 100% 100% X Corp Y Corp X Corp Y Corp (_______ gross income) (________ property’s basis)

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

  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-- (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. Shareholders 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 …. Property Corporation

  33. Reg. §1.316-2(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 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. Property Corporation

  34. Reg. §1.316-2(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 Property Corporation

  35. E&P Sourcing Rules • Distributions come from ____ _________ accumulated E&P • Compute _____ at yearend. • Shareholders treat all distributions as dividends if: • 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. Shareholders Property Corporation

  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 Property Corporation

  37. E&P Sourcing Rules(continued) • 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. Shareholders Property Corporation

  38. Rev. Rul. 74-164(Situation #1) Shareholders Effect on Shareholders $15,000 distribution at year’s midpoint 100% Dividend from CE&P Dividend from AE&P Total dividend X Corporation Deficit (1st half) $-50,000 CE&P (2nd half) 55,000 CE&P (year) $ 5,000 AE&P 40,000 Effect on X Corporation AE&P at year’s start CE&P Dividend from E&P AE&P at yearend

  39. Rev. Rul. 74-164(Situation #2) Shareholders Effect on Shareholders $15,000 distribution at year’s midpoint 100% Dividend from CE&P Return of capital (or gain) Total distribution Y Corporation CE&P (1st half) $75,000 Deficit (2nd half) -70,000 CE&P (year) $ 5,000 Accumulated deficit -60,000 Effect on X Corporation AE&P at year’s start CE&P Dividend from CE&P Accumulated deficit at yearend

  40. Rev. Rul. 74-164(Situation #3) Shareholders Effect on X Corporation $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 X Corporation Current deficit $-5,000 AE&P 40,000

  41. Rev. Rul. 74-164(Situation #4) Shareholders Effect on X Corporation $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 X Corporation Current deficit $-55,000 AE&P 40,000

  42. Lind et al., pp. 172-73part (a) Ann 100% ($10,000 basis) Effect on Ann $17,500 Dividend from E&P Reduction in Ann’s stock basis Ann’s capital gain Total distribution Pelican Corporation CE&P $ 5,000 AE&P 0 Effect on Pelican Corp Beginning E&P CE&P Dividend Ending E&P

  43. Lind et al., pp. 172-73part (b) Ann 100% ($10,000 basis) Effect on Ann $10,000 Dividend from CE&P Pelican Corporation CE&P $10,000 Accumulated deficit -15,000 Effect on Pelican Corp Beginning deficit CE&P Dividend from CE&P Ending deficit

  44. Lind et al., pp. 172-73part (c) $15,000 Effect on Ann Baker Corp Ann Dividend from CE&P (Apr. 1) Dividend from CE&P (Oct. 1) Dividend from AE&P (Apr. 1) Dividend from AE&P (Oct. 1) 50% of shares (basis $5,000) $10,000 Apr. 1 Return of capital (Oct. 1) Stock basis declines to $ July 1 $5,000 Oct. 1 $5,000 100% ($10,000 basis) Oct. 1 Effect on Baker Corp Pelican Corporation CE&P $ 4,000 AE&P 10,000 Dividend from CE&P (Oct. 1) Dividend from AE&P (Oct. 1) Return of capital (Oct. 1) Stock basis declines to $ Effect on Pelican Corp Step 1: Allocate $4,000 CE&P ___ ____ to $10,000 dividend on Apr. 1 and $10,000 dividend on Oct. 1 Beginning E&P CE&P Dividend from CE&P Dividend from AE&P Ending E&P Step 2: Allocate $10,000 AE&P to Apr. 1 distribution ______

  45. Lind et al., pp. 172-73part (d) $15,000 Effect on Ann Baker Corp Ann Dividend from AE&P (Apr. 1) Return of capital (Apr. 1) Return of capital (Oct. 1) Capital gain (Oct. 1) 50% of shares (basis $3,750) $10,000 Apr. 1 July 1 $5,000 Oct. 1 $5,000 100% ($10,000 basis) Oct. 1 Effect on Baker Corp Pelican Corporation Current deficit $-10,000 AE&P 10,000 Return of capital (Oct. 1) Stock basis declines to $ Effect on Pelican Corp Step 1: Calculate E&P available on April 1 Beginning E&P Dividend from AE&P Current deficit Ending deficit Step 2: The April 1 return of capital reduces Ann’s stock basis to $______.

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