slide 7-1 assignments for next class: read chapter 5, pages 1 through top of page 16

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AssignmentsAssignments

For next class:Read Chapter 5, pages 1 through top of page 16

ChapterChapter44Corporate Nonliquidating

DistributionsCorporate Nonliquidating

Distributions

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ProblemsProblems

Property Distributions:C4-33, C4-34, C4-35, C4-37

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Constructive DividendsConstructive Dividends

Constructive dividends are payments made to or other benefits received by shareholders that are not initially declared as being dividends but are recharacterized as dividends by the IRS

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Constructive DividendsConstructive Dividends

Examples:Excessive compensation paymentsExcessive payments for use of propertyLoans that are not bona fidePayments of shareholders’ personal expensesPersonal use of corporate propertyBargain purchase of corporate property

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Example 7 – Constructive DividendsExample 7 – Constructive Dividends

Bad Corporation pays $150,000 per year in rent to its sole shareholder for use of business property. The IRS determines that a fair rental payment would be $90,000 per year.Bad Corporation’s taxable income increases by

$60,000 per year (considered a dividend paid)Shareholder’s rental income decreases and dividend

income increases by $60,000 per year

Problem: C4-38

C corporationsC corporations

Distributions of Stock

and Stock Rights

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Taxation of ShareholdersTaxation of Shareholders

[IRC §305(a)] Gross income does not include distributions of the distributing corporation’s stock or stock rights received by shareholders with respect to their stock

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Exceptions:Distributions in lieu of money [IRC §305(b)(1)]Disproportionate distributions [IRC §305(b)(2)]Distributions of common stock to some shareholders

and preferred stock to others [IRC §305(b)(3)]Distributions on preferred stock unless change in

conversion ratio after common stock dividend or stock split [IRC §305(b)(4)]

Distributions of convertible preferred stock unless no disporportionate effect [IRC §305(b)(5)]

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[IRC §307(a), Reg. §1.307-1, & Reg. §1.307-2] If a nontaxable stock dividend is received, the basis of the stock is allocated between the old and new sharesIf shares are identical, basis is divided evenlyIf not, basis is allocated based on relative FMVs

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[IRC §307(b)] If nontaxable stock rights are received and the FMV of the stock rights is at least 15% of the FMV of the stock, the basis is allocated between the old stock and the stock rights on the basis of relative FMVsIf the stock rights lapse, the basis is added back to

the basis of the stock [Reg. §1.307-1(b)]If the stock rights are exercised, the basis of the

stock rights is added to the basis of the new stock [Reg. §1.307-1(b)]

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[IRC §307(b)] If nontaxable stock rights are received and the FMV of the stock rights is less than 15% of the FMV of the stock, the basis of the stock rights is zeroShareholder can elect to allocate basis based on

relative FMVs

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Taxation of C CorporationTaxation of C Corporation

[IRC §311(a)(1)] A corporation recognizes no gain or loss on the distribution of its own stock or stock rights to its shareholders with respect to its already outstanding stock [IRC §312(d)(1)] Nontaxable distributions do not

reduce current or accumulated E&P

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Taxable DistributionsTaxable Distributions

Distributions of a corporation’s own stock or stock rights that are taxable (due to one of the five exceptions), are treated like any other corporate distribution of property

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ExamplesExamples

Problems: C4-40, C4-41, C4-42

slide 7-1 assignments for next class: read chapter 5, pages 1 through top of page 16

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