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What is the tax treatment of dividend distribution?
contingent upon the distributing corporation’s earnings and profit
When are distributions considered dividends?
to the extent of the corporation’s current and accumulated earnings and profit
When are distributions considered return of capital?
distributions in excess of earnings and profit
Explain the tax consequences of dividends
must report as income in the year they are received
Explain the tax consequences of returns of capital
reduce the shareholder’s adjusted basis in the stock
once the adjusted basis is reduced to 0, any excess is treated as gain on the sale of the stock
What are earnings and profit?
a measure of a corporation’s economic capacity to pay a dividend
How are earnings and profit distributed?
first to current earnings and profit, then to accumulated earnings and profit
What is the measure of a cash distribution?
amount of cash distributed
What is the measure of a property distribution?
FMV at date of distribution
if there is a liability, then it is FMV minus the liability
measure can never be less than 0
basis in property received is FMV
What are constructive dividends?
occurs when no actual cash or property dividend has been declared or paid
can result from a variety of transactions (intentional or unintentional)
What are commonly encountered constructive dividends?
unreasonable compensation
corporate payment of shareholder liabilities
shareholder loans
corporate loans
free personal use of corporate property
bargain sales and rentals to shareholders
premium sales and rentals to the corporation
When are stock dividends not taxable?
if shareholders receive stock in proportion to their ownership interest
What happens if the stock dividend is not taxable?
total basis of old stock is allocated between old and new stock based on their relative FMVs
What is the tax consequence of a taxable stock dividend?
shareholder has income to extent of corporation’s current and accumulated earnings and profit
What is the shareholder’s adjusted basis of a taxable stock dividend?
the FMV on distribution date
Explain disproportionate distribution
occurs if shareholders’ ownership interest in firm is different after distribution
Explain the taxability of stock rights
proportionate distributions of stock rights are nontaxable
disproportionate distributions of stock rights are taxable
What are stock rights?
holder has the option to acquire new shares of stock in a corporation within a defined period and at a specific price
What are stock redemptions?
occurs when corporation acquires its stock from its shareholders in return for cash or property
Explain the surrender of stock
may be treated as sale or exchange
may be classified as a dividend to extent of redeeming corporation’s earnings and profit
Explain Code Sec. 303
governs the treatment of redemptions of stock to cover death taxes and expenses
Explain the limitations of proceeds under Code Sec. 303
limited to sum of estate, inheritance, legacy, or succession taxes imposed (including interest) and funeral and administrative expenses
Explain the requirements of Code Sec. 303
distribution must be in redemption of a shareholder’s stock
stock being redeemed must be included in the decedent’s gross estate for federal estate tax purposes
value must exceed 35% of adjusted gross estate
How do you calculate adjusted gross estate under Code Sec. 303?
gross estate less the sum of:
funeral expenses
administrative expenses
claims against the estate
unpaid mortgages and other indebtedness
loss incurred by the estate
Explain the 35%-rule exception under Code Sec. 303
applies to an estate that includes stock of two or more corporations