stock distributions tx 8120. achievement goals 1.describe consequences of ______ distributions and...

Stock DistributionsTx 8120

Achievement Goals

1. Describe consequences of ______ distributions and

2. Determine the impact of stock _______ on shareholders.

You should be able to:

Non-Liquidating Distributions

Shareholders

Corporation

Property

Shareholders

Corporation

Stock

Shareholders

Corporation

Stock Property

Property Distribution Stock Distribution Stock Redemption

1. How much gain or loss do shareholders recognize?

2. What basis do shareholders take in stock received?

3. When does the holding period begin in stock received?

1. How much gain or loss does the corporation recognize?

2. How is the corporation’s E&P affected?

Shareholder (distributee) Issues Corporation (distributor) 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

Stock

Stock includes: (1) ______ in distributor and (2) ______ _______ in distributor

Historical Perspective

• U.S. Constitution, ____ Amendment, allowed Congress to tax income.

• Revenue Act of ____ required taxation of all dividends.

• Eisner v. Macomber (S.Ct., 1920) held ______ stock dividends on ______ stock were not income.

• Revenue Act of ____ said stock dividends were not taxable.

Section 305(a)

(a) General rule.

Except as provided in this section, gross income does not include the amount of any distribution of the stock of a corporation made by such corporation to its shareholders with respect to its stock.

Shareholders

Corporation

Stock

Shareholder issuesGain or loss recognized

Distributions in which ______________ interests do not change are nontaxable.

(a) Pro rata C.S. dividend on ____(b) Pro rata ____ dividend on C.S.

where no ____ previously outstanding

Section 305(b)(1)

(b) Exceptions.

Subsection (a) shall not apply to a distribution by a corporation of its stock, and the distribution shall be treated as a distribution of property to which section 301 applies--

Shareholders

Corporation

Stock orProperty

(1) Distributions in lieu of money. If the distribution is, at the election of any of the shareholders (whether exercised before or after the declaration thereof), payable either--

(A) in its stock, or(B) in property.


Dividend Reinvestment Plans


Shareholders

Corporation

DRIPs give shareholders a choice between:(1) ____ distributions or(2) Additional _______ worth slightly more than cash option.

CashOption

Shares Worth _____ of Cash Option

Choice for Some, But Not Others


ShareholdersOwning ≥ 800 Shares

Corporation

Assume a corporation with only one class of common stock declares a 4-for-1 stock split and that shareholders holding at least 800 shares can receive corporate bonds in lieu of additional shares.

ShareholdersOwning < 800 Shares

Almost Identical Classes


Class AShareholders

Corporation

Assume a corporation has two classes of common stock possessing identical rights except dividends to Class A owners must be paid in cash while dividends to Class B owners must be paid in additional shares.

Class BShareholders

Section 305(b)(2)

(b) Exceptions.


Shareholders

Corporation

Property orInterests

(2) Disproportionate distributions. If the distribution (or a series of distributions of which such distribution is one) has the result of--

(A) the receipt of property by some shareholders, and(B) an increase in the proportionate interests of other shareholders in the assets or earnings and profits of the corporation.


Increase in Proportionate Interest?


CommonShareholders

Corporation

If common shareholders receive a pro rata distribution of preferred stock, do they increase their proportionate interests vis-à-vis the preferred shareholders?

PreferredStock



PreferredShareholders

Corporation

If preferred shareholders receive a pro rata distribution of preferred stock, do they increase their proportionate interests vis-à-vis the common shareholders?

PreferredStock




Corporation

If preferred shareholders receive a pro rata distribution of common stock, do they increase their proportionate interests vis-à-vis the common shareholders?

CommonStock



CommonShareholders

Corporation

If common shareholders receive a pro rata distribution of common stock, do they increase their proportionate interests vis-à-vis the preferred shareholders?

CommonStock

Section 305(b)(3)

(b) Exceptions.


Corporation

Common Stock orPreferred Stock

(3) Distributions of common and preferred stock. If the distribution (or a series of distributions of which such distribution is one) has the result of--

(A) the receipt of preferred stock by some common shareholders, and(B) the receipt of common stock by other common shareholders.


CommonShareholders

Section 305(b)(4)

(b) Exceptions.


Corporation

Stock

(4) Distributions on preferred stock. If the distribution is with respect to preferred stock, other than an increase in the conversion ratio of convertible preferred stock made solely to take account of a stock dividend or stock split with respect to the stock into which such convertible stock is convertible.



Section 305(b)(5)

(b) Exceptions.


Shareholders

Corporation

ConvertiblePreferred

Stock

(5) Distributions of convertible preferred stock. If the distribution is of convertible preferred stock, unless it is established to the satisfaction of the Secretary that such distribution will not have the result described in paragraph (2).


Summary: Taxable v. Nontaxable

• Based on _________ ______ concept, stock dividends are nontaxable, §305(a).

• Exceptions, §305(b)– Shareholder _____ between property or stock– ________________ distributions– ______ shares to some common shareholders,

__________ shares to others– Distributions to ___________ shareholders– Distributions of convertible __________

Dichotomizing Stock Distributions

Taxable StockDistribution, §305(_)

Nontaxable StockDistribution, §305(_)

Treat generally as ________ distribution.

Shareholders

Corporation

Stock

Section 307(a)

(a) General rule.--If a shareholder in a corporation receives its stock or rights to acquire its stock (… “new stock”) in a distribution to which section 305(a) applies, then the basis of such new stock and of the stock with respect to which it is distributed (… “old stock”), respectively, shall, in the shareholder’s hands, be determined by allocating between the old stock and the new stock the adjusted basis of the old stock.

Shareholders

Corporation

Stock

Shareholder issuesNontaxable stock distribution

Basis of shares received

€

Basis of new stock = Basis of ___ stock x FMV of ___ stock after distributionFMV of ___ stock after distribution

Section 1223(5)

(5) In determining the period for which the taxpayer has held stock or rights to acquire stock received on a distribution, if the basis of such stock or rights is determined under section 307 …, there shall … be included the period for which he held the stock in the distributing corporation before the receipt of such stock or rights upon such distribution.

Shareholders

Corporation

Stock

Shareholder issuesNontaxable stock distribution

Holding period of shares received

Shareholders

Corporation

Stock

Corporate issuesNontaxable stock distribution

Gain or loss recognized

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.

Section 312(d)(1)(B)

(d) Certain distributions of stock and securities.--

Shareholders

Corporation

Stock

(1) In general.--The distribution to a distributee by or on behalf of a corporation of its stock or securities, of stock or securities in another corporation, or of property, in a distribution to which this title applies, shall not be considered a distribution of the earnings and profits of any corporation--

(B) if the distribution was not subject to tax in the hands of such distributee by reason of section 305(a).

Corporate issuesNontaxable stock distribution

E&P impact

Nontaxable Stock Distributions§305(a)

• Shareholders reallocate basis of prior shares between “new” and “old” shares based on ________ ____.

• Holding period of prior shares ______ to “new” shares.

• Distributor recognizes no gain or loss from issuing ____ shares.

• _____ is not affected.

Section 301(b)(1)

(b) Amount distributed.

Shareholders

Corporation

(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.

Stock

Shareholder issuesTaxable stock 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

Stock


Basis of shares received

Section 1223(2)

Shareholders

Corporation

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.

Stock


Holding period of shares received

Shareholders

Corporation

Stock

Corporate issuesTaxable stock distribution


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

Stock

Section 312(d)(1)(A)

(d) Certain distributions of stock and securities.--

(1) In general.--The distribution to a distributee by or on behalf of a corporation of its stock or securities, of stock or securities in another corporation, or of property, in a distribution to which this title applies, shall not be considered a distribution of the earnings and profits of any corporation--

(A) if no gain to such distributee from the receipt of such stock or securities, or property, was recognized under this title ….

Corporate issuesTaxable stock distribution

E&P impact

Taxable Stock Distributions§305(b)

• Shareholders treat FMV of “new” shares as ____________ distribution.– Shareholders receive dividend to extent of ____. – Shareholders take _____ basis in “new” shares.– Holding period of “new” shares starts when

__________.– Distributor recognizes no gain or loss from issuing

___ shares.– E&P reduced by ____ of “new” shares, §312(b)(2).

Summary of Stock Distributions

Nontaxable TaxableShareholder Issues

1. Gain or loss recognized None, §305(a) Dividend to extent of E&P, §305(b)

2. Basis of stock received Relative FMV allocation, §307(a) FMV, §301(d)

3. Holding period of stock Tacks from old shares, §1223(5) No tacking, §1223(2)

Corporation Issues

1. Gain or loss recognized None, §311(a) None, §311(a)

2. Impact on E&P None, §312(d)(1)(B) Reduced by stock’s FMV, §312(b)(2)

Frank(Class A: 100 shares)

Hill Corporation

Class A voting commonClass B voting common

Ample E&P

Lind et al., pp. 308-309part (a)

Fay(Class B: 50 shares)

Joyce(Class B: 50 shares)

100 shares of nonconvertible P.S.



This stock distribution is:

Nontaxable since proportionate interests do not change, §305(a)

Taxable since one or more SHs can choose between property or stock, §305(b)(1)

Taxable since some SHs receive property while others increase proportionate interest, §305(b)(2)

Taxable since some common SHs receive C.S. while other common SHs receive P.S., §305(b)(3)

Taxable since preferred SHs receive distribution (exception for change in conversion ratio), §305(b)(4)

Taxable since convertible P.S. is distributed (exception if proportionate interests unlikely to change, §305(b)(5)

Each class A share possesses the same claim on earnings, claim on assets, and voting rights as each class B share.


Hill Corporation


Ample E&P



5 shares of class B or cash (picks cash)

5 shares of class B or cash (picks stock)

10 shares of class A common stock

Is the distribution taxable to:Joyce?

Fay?

Frank?


Lind et al., pp. 308-309part (b)


Hill Corporation


Ample E&P



Pro rata cash distribution

Pro rata cash distribution

Prorata distribution of class A stock

Is the distribution taxable to:Joyce?

Fay?

Frank?


Lind et al., pp. 308-309part (c)


Hill Corporation

Class A voting commonClass B nonconvertible 5% preferred

Ample E&P



Class B shares

How does Frank treat this distribution?







Lind et al., pp. 308-309part (d)


Hill Corporation

Class A voting commonClass B nonconvertible 5% preferred

Ample E&P



Class C nonconvertible preferred with rights subordinate to class B stock








Lind et al., pp. 308-309part (e)


Hill Corporation

Class A voting common10% debentures convertible into common

Ample E&P

Debenture Holders

Class Ashares








Conversion ratio is one common share

for $1,000 debenture

Annual 10%interest payment

Lind et al., pp. 308-309part (f)


Hill Corporation

Class A voting commonConvertible 10% preferred

Ample E&P

Preferred Shareholders

2-for-1stock split








Conversion ratio is one common share for four preferred

Annual 10%cash dividend

Lind et al., pp. 308-309part (g)


Hill Corporation


Ample E&P



Prorata distribution of nonconvertible P.S.

Prorata distribution of nonconvertible P.S.









Prorata distribution of class A stock

Lind et al., pp. 308-309part (h)


Hill Corporation


Ample E&P



Prorata distribution of convertible P.S.

Prorata distribution of convertible P.S.









Prorata distribution of 10 class A shares

Convertible into 5 class B shares any time

within 20 years

Lind et al., pp. 308-309part (i)

Shareholders

Corporation

StockRights

Shareholder issuesNontaxable stock rights

Basis of rights received

Section 307(b)(1)(b) Exception for certain stock rights.

(1) In general. If--

(A) a corporation distributes rights to acquire its stock to a shareholder in a distribution to which section 305(a) applies, and(B) the fair market value of such rights at the time of the distribution is less than 15 percent of the fair market value of the old stock at such time,

then subsection (a) shall not apply and the basis of such rights shall be zero, unless the taxpayer elects … to determine the basis of the old stock and of the stock rights under the method of allocation provided in subsection (a).

Stock Rights: Planning

Shareholders

Corporation

StockRights

Shareholder issuesNontaxable stock rights

Basis of rights received

Even when the ___ of stock rights received < ___% of the old stock’s ___, the shareholder expecting to sell the rights may ____ to allocate some basis to

the rights to minimize capital gain.

Nontaxable TaxableShareholder Issues

1. Gain or loss recognized None, §305(a) Dividend to extent of E&P, §305(b)

2. Basis of rights received If FMV of rights < 15% of old stock and no election, zero basis, §307(b)

Otherwise, allocation, §307(a)

FMV, §301(d)

3. Holding period of rights Tacks from old shares only if basis allocation occurs, §1223(5)

No tacking, §1223(2)

Corporation Issues

1. Gain or loss recognized None, §311(a) None, §311(a)

2. Impact on E&P None, §312(d)(1)(B) Reduced by rights’ FMV, §312(b)(2)

Summary of Stock Right Distributions

Disposition of Stock Rights

If the shareholder Then

2. Exercises rights

Selling price less _________ basis equals gain or loss

__________ basis adds to cost of new shares

_________ basis reverts to original shares

1. Sells rights

3. Allows rights to lapse

Reg. §1.307-1(a)

stock distributions tx 8120. achievement goals 1.describe consequences of ______ distributions and...

Documents

stock dividends

stock distributionstx

impact of stock

stock split

class of common stock

classes of common stock

distribution of property

loss recognizeddistributions