Module 8: Entity/Owner Transactions

Question 1

When are distributions to shareholders taxable to shareholders?

Answer 1

If distributions are classified as dividends

Question 2

Define dividend

Answer 2

Distribution property by a corporation out of its earnings and profits

Question 3

What is the order of the source of distributions?

Answer 3

1. Current E&P
2. Accumulated E&P
3. Return of capital (no E&P)

Question 4

When dividends are in excess of E&P, what allocation applies?

Answer 4

1. Current E&P = pro rata basis to each distribution

2. Accum. E&P = applied in chronological order

Question 5

What are constructive dividends?

Answer 5

Hidden/disguised dividends (trying to get a tax deduction when giving money to shareholder)

Question 6

What are examples of constructive dividends?

Answer 6

• excessive salaries paid to s/h employees
• excessive rents/royalties
• “loans” to s/h where there is no intent to repay
• sale of assets below FMV

Question 7

Define stock dividends

Answer 7

Distribution by corp of its own stock to s/h

Question 8

When would a stock dividend be taxable?

Answer 8

If the shareholder had a choice of receiving cash or other property

Taxable at FMV on distribution date

Question 9

What is the general rule for the taxable amount to the corp paying dividend?

Answer 9

Generally a payment of dividend does not create a taxable event

Question 10

What is the exception to the general rule of the taxable amount to corp paying dividend?

Answer 10

If corp distributes appreciated property, tax results are as follows:

• Corp recognizes gain as if property had been sold (FMV property - NBV = Corp gain)
• Recipient shareholder includes the FMV of property in income as dividends
• Corp cannot recognize loss

Question 11

When do stock redemptions occur?

Answer 11

When corp buys back stock from its s/hs

Question 12

Proportional stock redemption

Answer 12

Taxable dividend income (to s/h - ordinary income)

Question 13

Disproportional (substantially disproportionate) stock redemption

Answer 13

Subject to taxable capital gain/loss to shareholder

Question 14

What are the two forms of corporate liquidation?

Answer 14

1. Corp sells assets and distributes cash to s/hs

2. Corp distributes assets to s/hs

Question 15

What is the result of liquidation involving corp selling stock/distributing cash to s/h?

Answer 15

1. Corp recognizes gain/loss on sale of assets (Sale price - Basis = Taxable gain/loss)
2. S/h recognize gain/loss to extent cash exceeds adjusted basis of stock (Proceeds - Stock basis = Taxable gain/loss)

Question 16

What is the result of liquidation involving corp distributing assets to s/h?

Answer 16

1. Corp recognizes gain/loss as if it sold assets for FMV (FMV - Basis = Taxable gain/loss)
2. S/h recognizes gain or loss to extent that FMV of assets exceeds adjusted basis of stock (FMV - Stock basis = Taxable gain/loss)

Question 17

What are the different types of reorganizations?

Answer 17

1. Mergers or consolidations (Type A)
2. Acquisition by one corp of another corp’s stock, stock for stock (Type B)
3. Acquisition by one corp of another corp’s assets, stock for assets (Type C)
4. Dividing of corp into separate operating corps (Type D)
5. Recapitalization (Type E)
6. Mere change in identity, form, or place of organization (Type F)

Question 18

Why is a reorganization treated as a nontaxable transaction?

Answer 18

Because it results in the continuation of a business in modified form

Question 19

What is the continuity requirement?

Answer 19

The acquiring corp must continue the business of the old entity or use a signif. portion of the old corp’s assets

Question 20

What is the control requirement for reorganization?

Answer 20

At least 80% of total voting power of all classes of stock and at least 80% of all other classes of stock

Question 21

When a corp’s stock is sold or becomes worthless, how is it treated for original stockholder (for small business stock)?

Answer 21

Original stockholder can be treated as having an ordinary loss (fully tax deductible) instead of a capital loss, up to $50,000 ($100,000 MFJ)

Excess = capital loss

Question 22

If a noncorporate s/h holds qualified small business stock for > 5 years, how much of the gain on sale/exchange of stock may be excluded?

Answer 22

100%

Question 23

What is the exclusion max/limit?

Answer 23

Maximum exclusion and limited to 100% of the greater of:

• 10 times the taxpayer’s baiss in the stock; or
• $10M; $5M if MFS)