On that date, it sold a plot of land to a\r\nnoncorporate stockholder for ,000. ,000\r\n\r\n Overview of distributions:\r\n The portion of a distribution that is a dividend is included in the shareholder\u2019s gross income.\r\n The portion of the distribution that is not a dividend reduces the shareholder\u2019s tax basis in the corporation\u2019s stock\r\n The portion of the distribution that is not a dividend and is in excess of the shareholder\u2019s stock tax basis is treated as gain from sale or exchange of the stock\r\n\r\n\r\n Computing Earnings and Profits\r\n\r\n A \u201cdividend\u201d for tax purposes is:\r\n\r\nany distribution of property made by a corporation to its shareholders out of its earnings and profits (E& P)\r\n\r\n Two separate E& P concepts must be understood \r\n Current earnings and profits\r\n Accumulated earnings and profits\r\n\r\n Current E& P not distributed to shareholders is added to accumulated E& P at the beginning of the next taxable year\r\n\r\n Determining the Dividend\r\n\r\n Computing Earnings and Profits from Taxable Income\r\n\r\n Adjustments to taxable income fall into four broad categories:\r\n\r\n Income that is excluded from taxable income\r\n\r\n Deductions that do not require an economic outflow\r\n\r\n Deduction of expenses that require an economic outflow but are not deducted for computing taxable income\r\n\r\n Adjustment of timing for deductions or income because of accounting methods required for E& P computation\r\n\r\n Determining the Dividend\r\n\r\n Earnings and Profits\r\n\r\n81. 0 \t 0\r\n\r\n Stock Dividend Holding Period\r\n\r\n In January 2012, Joan Hill bought one share of Orban\r\n Corp. On March 1, 2012, Orban distributed\r\none share of preferred stock for each share of common stock\r\nheld. On March 1, 2012,\r\n Joan\u2019s one share of common stock had a fair market value of\r\n0, while the preferred stock had a fair market value of\r\n0. The holding period for the preferred stock starts in\r\na. Because of his inactivity\r\nin the business in recent years, Mark has decided to\r\nretire from the business and wishes to sell his stock. 302(b)(2):\r\n The shareholder owns less than 50 percent of the voting power immediately after the exchange\r\n The shareholder\u2019s percentage of voting stock and aggregate value after the redemption is less than 80 percent of the percentage before the redemption\r\n In computing the percentage ownership tests, constructive ownership rules under Sec.Ral had paid ,000\r\nfor the land in 2003, and it had a fair market value of\r\n,000 when the stockholder bought it. At the beginning of the year, Cable, a C corporation,\r\nhad accumulated earnings and profits of 0,000. Accordingly,\r\n Pike will distribute cash of 0,000 in redemption\r\nof all of the stock owned by Mark. 318 must be used:\r\n Family attribution (spouse, children, grandchildren, parents)\r\n Attribution from entities to owners or beneficiaries\r\n Attribution from owners or beneficiaries to entities\r\n Option attribution\r\n\r\n Stock Redemptions\r\n\r\n Example\r\n\r\n\t A shareholder owns 60 of the corporation\u2019s 100 shares of voting common stock before the redemption.\r\n\r\n What percentage ownership test(s) must be met for the shareholder to receive exchange treatment under \u00a7302(b)(2)? Spartan redeems all of Shareholder A\u2019s stock on July 1 for ,000.
Jim is paid a salary of ,000,000 per year and Ginny is paid ,000,000 per year since she also does the accounting.
Ginny owns 42% of the common stock outstanding and Jim owns 48%.
Ginny’s mother owns the remaining 10% of the stock.
Learning Objectives\r\n\r\n Explain the basic tax law framework that applies to property distributions from a corporation to a shareholder\r\n\r\n Compute a corporation\u2019s earnings and profits and calculate the dividend amount received by a shareholder\r\n\r\n Identify situations in which a corporation may be deemed to have paid a \u201cconstructive dividend\u201d to a shareholder\r\n\r\n Comprehend the basic tax rules that apply to stock dividends\r\n\r\n Learning Objectives\r\n\r\n Comprehend the different tax consequences that can arise from stock redemptions\r\n\r\n Contrast a partial liquidation with other types of stock redemptions and describe the difference in tax consequences to the shareholders\r\n\r\n Framework for Property Distributions\r\n\r\n Corporations cannot deduct dividend distributions and this creates the \u201cdouble taxation\u201d of the corporation\u2019s income.\r\n Distributions to shareholders generally receive preferential tax treatment:\r\n Dividends must be included in gross income (albeit generally taxed at a lower tax rate).\r\n Distributions may result in a tax-free return of capital.\r\n Distributions may result in capital gains.\r\n\r\n Framework for Property Distributions\r\n\r\n Payments to shareholders are deductible by the corporation if the payment relates to services provided by the shareholder (such as salary, bonus, interest, or rent).\r\n\r\n If these payments are unreasonable, then the unreasonable (excessive) portion may be treated as a constructive dividend and the payment is no longer deductible.\r\n\r\n Constructive Dividends\r\n\r\n Examples of disguised (constructive) dividends \u2013 \r\n\r\n Unreasonable compensation\r\n\r\n Bargain sales of property to shareholders\r\n\r\n Shareholder use of corporate assets without an arm\u2019s-length payment\r\n\r\n Loans from shareholders at excessive interest rates\r\n\r\n Corporate payments of the shareholder\u2019s personal expenses\r\n\t\r\n\r\n Constructive Dividend\r\n\r\n90. At the beginning of the year, Westwind, a C corporation,\r\nhad a deficit of ,000 in accumulated earnings and\r\nprofits. On the date of the distribution,\r\nthe following data were available:\r\n\t Adjusted basis of land \t\t$ 6,500\r\n\t Fair market value of land \t 14,000\r\n\t Mortgage on land \t\t 5,000\r\n For the year ended December 31, 2011, Gelt had earnings\r\nand profits of ,000 without regard to the dividend distribution.\r\n If the mortgage on the land was assumed by the sole\r\nshareholder, by how much should the dividend distribution\r\nreduce Gelt\u2019s earnings and profits? After the distribution of the preferred stock, Joan\u2019s bases\r\nfor her Orban stocks are\r\n Common \t Preferred\r\na. 5 \t $ 75\t\t PS = (0\/0) x 0 = \r\nc. December 2012.\r\n\r\n Stock Redemptions\r\n\r\n Form of a Stock Redemption\r\n A redemption occurs when a corporation acquires its stock from a shareholder in exchange for property\r\n It does not matter if the acquired stock is canceled, retired, or held as treasury stock.\r\n A redemption may result in a dividend to the shareholder or may be treated as a sale or exchange of the redeemed shares if certain requirements are met.\r\n Individuals prefer exchange treatment because of the ability to recover their stock basis.\r\n\r\n Corporate shareholders prefer dividend treatment because of the dividends received deduction.\r\n\r\n Three types of redemptions are treated as exchanges by determining the effect of the redemption on the redeemed shareholder:\r\n Redemptions that are Substantially Disproportionate are treated as sales.\r\n Redemptions in Complete Redemption of all of the Stock of the Corporation Owned by the Shareholder\r\n Redemptions that are not Essentially Equivalent to a Dividend\r\n\r\n\r\n Stock Redemptions\r\n\r\n Stock Redemption\r\n\r\n92.
On June 30, 2011, Ral Corporation had earnings\r\nand profits of 0,000. For the current year, Westwind reported earnings\r\nand profits of ,000. What was the amount of Westwind\u2019s accumulated\r\nearnings and profits deficit at year-end? 0 \t 0\t\t CS = (0\/0) x 0 = 5\r\nd. Two unrelated individuals, Mark and David, each own\r\n50% of the stock of Pike Corporation, which has accumulated\r\nearnings and profits of 0,000. 0,000 dividend.\r\n\r\n Stock ownership tests must be met for treatment as substantially disproportionate under Sec.