Property Distributions Tx 8120

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Property DistributionsTx 8120
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Things to Achieve
You should be able to

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.

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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 corporations _____
affected?
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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
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Section 301(a)
Shareholder issues Gain or loss recognized
(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
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Section 301(c)(1)
Shareholder issues Gain or loss recognized
(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
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Section 316(a)
Shareholder issues Gain or loss recognized
(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
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Section 301(c)(2)
Shareholder issues Gain or loss recognized
(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
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Section 301(c)(3)
Shareholder issues Gain or loss recognized
(c) Amount taxable. In the case of a
distribution to which subsection (a) applies--
(3) Amount in excess of basis.
(A) That 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
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Summary Shareholders Income
Shareholder issues Gain or loss recognized
_____ ______ to extent of corporations EP
Amount of Property Distribution
_______ of capital to extent of stock _____
_______ gain for any _______ amount
Shareholders
Property
Corporation
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Section 301(b)
Shareholder issues Gain or loss recognized
(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
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Section 301(d)
Shareholder issues Basis of property received
(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
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Section 1223(2)
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.
Shareholders
Property
Corporation
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Section 311(a)
Corporate issues Gain or loss recognized
(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
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Corporate issues Gain or loss recognized
Distributing Loss Property
Shareholder
Property FMV Basis
Corporation (EP 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?
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Section 311(b)
Corporate issues Gain or loss recognized
(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
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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.

Corporations ______ ________ is the greater of
propertys ____ or distributed __________.
Shareholders
Property
Corporation
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Corporate issues Gain or loss recognized
Distributing Liabilities
Shareholder
Property FMV Basis Liability
Corporation (EP 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?
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Earnings and Profits
Corporate issues EP impact

• Increased for ____ recognized on appreciated
  property
• Recognized if ___ gt 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
  EP deficit.

Shareholders
Property
Corporation
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Corporate issues EP impact
Impact Is Identical
Appreciated Property
Depreciated Property
Shareholders
Shareholders
FMV Basis
FMV Basis
Corporation
Corporation
EP Impact from Distribution Increased for ___
recognized gain, 311(b)(1) Decreased for ___
FMV, 312(b)(2) EP Impact If Sold and Proceeds
Distributed Increased for ___ recognized gain,
1001(c) Decreased for distribution of ___
proceeds, 312(a)(1)
EP Impact from Distribution ___ effect from
unrecognized loss, 311(a)(2) Decreased for ___
basis, 312(a)(3) EP Impact If Sold and
Proceeds Distributed Decreased for ___
recognized loss, 1001(c) Decreased for
distribution of ___ proceeds, 312(a)(1)
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Appreciated Property Distribution
How much gain or loss does the corporation
recognize? How does the distribution affect
EP?
What is the distributions effect on the
shareholder?
Sole Shareholder
Basis
Property FMV Basis
Corporation (CEP 3,000 no AEP)
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Earnings and Profits(continued)
Corporate issues EP impact

• _________ for liabilities shareholder ________ or
  takes property subject to, 312(c)
• _________ for _________ amount of corporations
  own obligations (or issue price if ____),
  312(a)(2)

Shareholders
Property
Corporation
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Original Issue Discount
Shareholder
100
30-year, 1 Y bonds Face value 800,000 FMV
(issue price) 250,000
Y Corporation (EP 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
EP?
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Constructive Dividends

• Preceding rules apply only to property a
  corporation pays to its shareholder with respect
  to its _____, 301(a).
• Dont apply to shareholders who receive
• Compensation as an _________,
• Interest or principal as a _______,
• Rent as a _______,
• Royalties as a _______, or
• Invoice amounts as a _______.

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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 ____

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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

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Corporate Loan to Shareholder
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 gt 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 _at_ ___, (b)
Shareholder-level tax _at_ ___, and (c)
Possible shareholder deduction _at_ ___.
Corporation (EP 400,000)
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Avoiding Excessive Salary
Constructive dividends Shareholder-employee

• _______ 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

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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 yachts full ______ ______.
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Constructive dividends Bargain sale
Rev. Rul. 69-630
Result of 482 Reallocation
Actual Transaction
A
A
100
100
100
100
X Corp
Y Corp
X Corp
Y Corp
(_______ gross income)
(________ propertys basis)
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EP Pools
Accumulated EP
Current EP
Complicating Factors
Shareholders

1. _______ in one or both pools
2. ________ but insufficient EP
3. ________ distributions during year
4. Distributions before _____ known
5. Change in ________ during year

Property
Corporation
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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
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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 CEP is _______,
CEP is presumed ________. If CEP later proves
to be _________, shareholders amend their returns.
Property
Corporation
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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
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EP Sourcing Rules

• Distributions come from ____ _________
  accumulated EP
• Compute _____ at yearend.
• Shareholders treat all distributions as dividends
  if

• CEP _________ distributions or
• _____ _____ current distributions.
• If both CEP and AEP show ________, shareholders
  treat all distributions as returns of capital and
  then capital gains.

Shareholders
Property
Corporation
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EP Sourcing Rules(continued)

• If CEP is ______ but lt current distributions and
  ______ is insufficient to make up the short fall
• _______ CEP among distributions and
• Allocate AEP to distributions on ____ basis.

Shareholders
Property
Corporation
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EP Sourcing Rules(continued)

• If CEP is ______ and AEP is ______
• Prorate current ______ based on when the
  distribution occurs,
• Reduce _____ by this prorated deficit, and
• Apply AEP to each distribution on ____ basis.

Shareholders
Property
Corporation
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Rev. Rul. 74-164(Situation 1)
Shareholders
Effect on Shareholders
15,000 distribution at years midpoint
100
Dividend from CEP Dividend from AEP Total
dividend
X Corporation Deficit (1st half) -50,000 CEP
(2nd half) 55,000 CEP (year)
5,000 AEP 40,000
Effect on X Corporation
AEP at years start CEP Dividend from EP AEP
at yearend
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Rev. Rul. 74-164(Situation 2)
Shareholders
Effect on Shareholders
15,000 distribution at years midpoint
100
Dividend from CEP Return of capital (or
gain) Total distribution
Y Corporation CEP (1st half) 75,000 Deficit
(2nd half) -70,000 CEP (year)
5,000 Accumulated deficit -60,000
Effect on X Corporation
AEP at years start CEP Dividend from
CEP Accumulated deficit at yearend
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Rev. Rul. 74-164(Situation 3)
Shareholders
Effect on X Corporation
15,000 distribution at years midpoint
100
AEP at years start Current deficit at
midpoint Available for dividends Dividend from
AEP Current deficit after midpoint AEP at
yearend
X Corporation Current deficit -5,000 AEP 40,0
00
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Rev. Rul. 74-164(Situation 4)
Shareholders
Effect on X Corporation
15,000 distribution at years midpoint
100
AEP at years start Current deficit at
midpoint Available for dividends Dividend from
AEP Current deficit after midpoint Accumulated
deficit at yearend
X Corporation Current deficit -55,000 AEP 40,
000
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Lind et al., pp. 172-73part (a)
Ann
100 (10,000 basis)
Effect on Ann
17,500
Dividend from EP Reduction in Anns stock
basis Anns capital gain Total distribution
Pelican Corporation CEP 5,000 AEP 0
Effect on Pelican Corp
Beginning EP CEP Dividend Ending EP
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Lind et al., pp. 172-73part (b)
Ann
100 (10,000 basis)
Effect on Ann
10,000
Dividend from CEP
Pelican Corporation CEP 10,000 Accumulated
deficit -15,000
Effect on Pelican Corp
Beginning deficit CEP Dividend from CEP Ending
deficit
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Lind et al., pp. 172-73part (c)
15,000
Effect on Ann
Baker Corp
Ann
Dividend from CEP (Apr. 1) Dividend from CEP
(Oct. 1)
Dividend from AEP (Apr. 1) Dividend from AEP
(Oct. 1)
50 of shares (basis 5,000)
10,000
Apr. 1
Return of capital (Oct. 1) Stock basis declines
to
5,000
July 1
Oct. 1
100 (10,000 basis)
5,000
Oct. 1
Effect on Baker Corp
Pelican Corporation CEP 4,000 AEP 10,000
Dividend from CEP (Oct. 1)
Dividend from AEP (Oct. 1)
Return of capital (Oct. 1) Stock basis declines
to
Effect on Pelican Corp
Step 1 Allocate 4,000 CEP ___ ____ to 10,000
dividend on Apr. 1 and 10,000 dividend on Oct. 1
Beginning EP CEP Dividend from CEP Dividend
from AEP Ending EP
Step 2 Allocate 10,000 AEP to Apr. 1
distribution ______
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Lind et al., pp. 172-73part (d)
15,000
Effect on Ann
Baker Corp
Ann
Dividend from AEP (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
5,000
July 1
Oct. 1
100 (10,000 basis)
5,000
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 EP available on April 1
Beginning EP Dividend from AEP Current
deficit Ending deficit
Step 2 The April 1 return of capital reduces
Anns stock basis to ______.