2009_Solutions__003 - H Chapter Three H CORPORATE...

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H Chapter Three H CORPORATE DISTRIBUTIONS: CASH, PROPERTY, AND STOCK DIVIDENDS SOLUTIONS TO PROBLEM MATERIALS DISCUSSION QUESTIONS 3-1 Although not expressly stated in the text, corporate distributions generally fall into two main categories: liquidating and nonliquidating. Nonliquidating distributions result when the shareholder does not surrender part of his or her interest (i.e., stock). The treatment of these distributions is governed by §§ 301 and 316, which provide that a corporate distribution must be included in the shareholder’s gross income as a dividend to the extent it represents a distribution of the corporation’s earnings and profits. To the extent that the distribution is not out of corporate earnings and profits, it is treated as a return of capital to the shareholder to be applied against, and in reduction of, the adjusted basis of his or her stock. These general rules apply with some variation to distributions of cash, property, and the corporation’s own obligations. Falling within the broad scope of nonliquidating distributions are distributions of a corporation’s own stock: stock dividends. Under § 305, stock dividends are generally nontaxable unless they result in a change of the shareholders’ proportionate interests in the corporation. Liquidating distributions are those when the shareholder relinquishes all or a portion of his or her interest in the corporation in exchange for a distribution of corporate property. This exchange is referred to as a redemption . Redemptions generally are covered in § 302, which grants the shareholder sale treatment, assuming the distribution is not essentially equivalent to a dividend. These redemptions often occur during the normal course of business, and there is no change in the level of business operations by the corporation. When a termination of a portion of the business prompts the liquidating distribution, the distribution is treated as a redemption in partial liquidation and is subject to special rules of § 302(b)(4). Similarly, when the corporation ceases to conduct business, the redemption distribution falls under the complete liquidation rules of § 331. Distributions of stock of a subsidiary receive special attention since these result in some type of corporate division: so-called spin-offs, split-offs, and split-ups. Because the corporation continues to carry on its business and the shareholders maintain their interest in the new corporate arrangement, these distributions are normally tax free. These are covered in Chapter 7. The principal objectives underlying the rules contained in the various provisions governing corporate distributions are to set up a framework by which returns ‘‘of’’ capital can be distinguished from returns ‘‘on’’ capital. In effect, the whole thrust of these provisions is aimed at determining whether the shareholder has surrendered part of his or her interest, and thus should be granted sale or exchange
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This note was uploaded on 06/23/2009 for the course BUPA 539 taught by Professor Jamison during the Fall '09 term at IUPUI.

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2009_Solutions__003 - H Chapter Three H CORPORATE...

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