Chapter 4 - Chapter 4 Corporate Nonliquidating...

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Chapter 4 – Corporate Nonliquidating Distributions
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Objectives After studying this chapter, the student should be able to: 3. Determine the tax consequences of nonliquidating property distributions. 4. Determine the tax consequences of stock dividends and distributions of stock rights. 5. Distinguish between a stock redemption treated as a sale and one treated as a dividend. 6. Explain the tax treatment for preferred stock bailouts. 7. Determine when Sec. 304 applies to a stock sale and its consequences.
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Nonliquidating Distributions in General A shareholder must include in gross income as a dividend any nonliquidating distribution by a corporation to the extent that it is out of earnings and profits (E&P). As a result of the 2003 Act, qualified dividends received by a noncorporate shareholder in 2003 through 2010 are subject to a maximum 15% tax rate. The distribution can be in money, securities, or any other property except stock or stock rights of the distributing corporation. To the extent the distribution exceeds E&P, it is a return of capital and reduces the shareholder's basis in his stock. To the extent that the distribution exceeds the basis in the stock, gain is recognized that is a capital gain if the stock is a capital asset in the shareholder's hands. (See Example C4-1).
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Earnings and Profits The term E&P is not specifically defined in the Code. Its meaning must be determined with reference to judicial decisions, Treasury regulations, and some rules provided in the Code. The purpose is to measure a corporation's economic ability to pay dividends. E&P consists of two parts - current and accumulated E&P. Current E&P is calculated annually. Accumulated E&P is the sum of undistributed current E&P for all tax years less distributions made out of accumulated E&P and prior year current E&P deficits. Distributions come first from current E&P and then from accumulated E&P if current E&P is insufficient. (See Example C4-2.)
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The starting point for computing current E&P is the corporation's taxable income or NOL for the year. This must be adjusted to arrive at economic income or loss (current E&P) for the year. Table C4-1 provides a partial listing of the adjustments that must be made to taxable income to derive current E&P.
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Changes between taxable income Income Excluded from Taxable Income but Included in Income that is specifically excluded from gross income must be included in current E&P if it increases the corporation's ability to pay a dividend and is not a contribution of capital. (See Example C4-3.) Income Deferred to a Later Period. Gains and losses on property transactions are generally included in E&P when they are recognized for tax purposes. An exception is installment sales. Gain is recognized in the year of sale for E&P purposes in the case of an installment sale. (See Example C4-5.)
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This note was uploaded on 03/12/2010 for the course ACCT 2300 taught by Professor Thomasdownen during the Spring '06 term at Texas Tech.

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Chapter 4 - Chapter 4 Corporate Nonliquidating...

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