Property Distributions Tx 8120. Things to Achieve 1.Define _________, 2.Explain the effect of...

Property DistributionsTx 8120

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:

Non-Liquidating Distributions

Shareholders

Corporation

Shareholders

Corporation

Shareholders

Corporation

Property Distribution Stock Distribution Stock 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 ( ) Issues Corporation ( ) Issues

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 )

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 issuesGain or loss recognized

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.


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 ….


Section 301(c)(2)

(c) Amount taxable.


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.


Section 301(c)(3)

(c) Amount taxable.


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.


Summary: Shareholder’s Income

Shareholders

Corporation

Property

Amount ofProperty

Distribution

_____ ______ to extent of corporation’s E&P

_______ gain for any _______ amount

_______ of capital to extent of stock _____


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.


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 issuesBasis of property received

Section 1223(2)

Shareholders

Corporation

Property

Shareholder issuesHolding 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.

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 issuesGain or loss recognized

Distributing Loss Property


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: FMVBasis

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.


Section 311(b)

(b) Distributions of appreciated property.

Shareholders

Corporation

Property


(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 __________.

Distributing Liabilities


Shareholder


Property: FMVBasis

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?

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 issuesE&P impact

Impact Is Identical

Shareholders

Corporation

FMV $

Basis


Appreciated Property Depreciated 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)

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 $

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


Original Issue Discount

Shareholder

Y Corporation(E&P $800,000)

30-year, 1% Y bonds: Face value $800,000FMV (issue price) 250,000

100%

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?

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 _______.

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 ____

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

Corporate Loan to Shareholder

Shareholder


$300,000 no-interest loan

100%

Constructive dividendsShareholder-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 tax @ ___%, (b) Shareholder-level tax @ ___%, and (c) Possible shareholder deduction @ ___%.

• _______ 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 dividendsShareholder-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 ______ ______.

Constructive dividendsShareholder-employee

Constructive dividendsBargain sale

Rev. Rul. 69-630

A

X Corp

100%

Y Corp

100%

A

X Corp

Result of §482 Reallocation

Y Corp

Actual Transaction

100%100%

(_______ gross income) (________ property’s basis)

E&P Pools

Current E&P Accumulated E&P

Shareholders

Corporation

Property

Complicating Factors:1. _______ in one or both pools2. ________ but insufficient E&P3. ________ distributions during year4. Distributions before _____ known5. Change in ________ during year

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 ….

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

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.

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

Corporation

Property

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.

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

€

CE&P attributable to distribution = CE&P x Current distribution at issueSum of current distributions

E&P Sourcing Rules(continued)

Shareholders

Corporation

Property

€

Portion treated as dividend = AE &P - Prorated current deficit on distribution date

• 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.

Rev. Rul. 74-164(Situation #1)

Shareholders

X Corporation

Deficit (1st half) $-50,000CE&P (2nd half) 55,000CE&P (year) $ 5,000AE&P 40,000

$15,000 distribution at

year’s midpoint

100%

Dividend from CE&PDividend from AE&PTotal dividend

Effect on Shareholders

AE&P at year’s startCE&PDividend from E&PAE&P at yearend

Effect on X Corporation


Shareholders

Y Corporation

CE&P (1st half) $75,000Deficit (2nd half) -70,000CE&P (year) $ 5,000Accumulated deficit -60,000


year’s midpoint

100%

Dividend from CE&PReturn of capital (or gain)Total distribution

Effect on Shareholders

AE&P at year’s startCE&PDividend from CE&PAccumulated deficit at yearend



Shareholders

X Corporation

Current deficit $-5,000AE&P 40,000


year’s midpoint

100%

AE&P at year’s startCurrent deficit at midpointAvailable for dividendsDividend from AE&PCurrent deficit after midpointAE&P at yearend



Shareholders

X Corporation



year’s midpoint

100%

AE&P at year’s startCurrent deficit at midpointAvailable for dividendsDividend from AE&PCurrent deficit after midpointAccumulated deficit at yearend


Ann

Pelican Corporation

CE&P $ 5,000AE&P 0

$17,500

100%($10,000 basis) Effect on Ann

Lind et al., pp. 172-73part (a)

Effect on Pelican Corp

Dividend from E&PReduction in Ann’s stock basisAnn’s capital gainTotal distribution

Beginning E&PCE&PDividendEnding E&P

Ann

Pelican Corporation

CE&P $10,000Accumulated deficit -15,000

$10,000

100%($10,000 basis)

Lind et al., pp. 172-73part (b)

Effect on Ann


Dividend from CE&P

Beginning deficitCE&PDividend from CE&PEnding deficit

Ann

Pelican Corporation

CE&P $ 4,000AE&P 10,000

$10,000

Lind et al., pp. 172-73part (c)

100%($10,000 basis)

Baker Corp

$5,000

$5,000

50% of shares (basis $5,000)

$15,000

Oct. 1

Oct. 1

Apr. 1July 1

Effect on Ann


Effect on Baker Corp

Dividend from CE&P (Apr. 1)Dividend from CE&P (Oct. 1)

Beginning E&PCE&PDividend from CE&PDividend from AE&PEnding 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)

Dividend from AE&P (Oct. 1)

Return of capital (Oct. 1)Stock basis declines to $


Step 2: Allocate $10,000 AE&P to Apr. 1 distribution ______

Ann

Pelican Corporation


$10,000

Lind et al., pp. 172-73part (d)

100%($10,000 basis)

Baker Corp

$5,000

$5,000

50% of shares (basis $3,750)

$15,000

Oct. 1

Oct. 1

Apr. 1July 1

Effect on Ann


Effect on Baker Corp

Dividend from AE&P (Apr. 1)

Beginning E&PDividend from AE&PCurrent deficitEnding deficit

Step 1: Calculate E&P available on April 1

Return of capital (Apr. 1)Return of capital (Oct. 1)Capital gain (Oct. 1)


Step 2: The April 1 return of capital reduces Ann’s stock basis to $______.

Property Distributions Tx 8120. Things to Achieve 1.Define _________, 2.Explain the effect of...

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