CHAPTER6-LECTURE1(ANDLECTURE2-PROBLEMS)

CHAPTER6-LECTURE1(ANDLECTURE2-PROBLEMS) - CHAPTER 6...

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CHAPTER 6 CORPORATIONS: REDEMPTIONS AND LIQUIDATIONS THIS CHAPTER DEALS WITH DISTRIBUTIONS THAT REPRESENTS A RETURN OF SHAREHOLDER’S INVESTMENT (RETURN OF CAPITAL) AS OPPOSED TO A DISTRIBUTION OF CORPORATION’S PROFITS (DIVIDENDS) AS IN CHAPTER 5. I. REDEMPTION SALE OF STOCK BACK TO CORPORATION SALES PRICE - BASIS IN STOCK = CAPITAL GAIN (LOSS) (LOSSES MAY BE DISALLOWED IF SHAREHOLDER IS RELATED TO THE CORPORATION AS DISCUSSED LATER IN CHAPTER 6) (1) REASONS FOR REDEMPTION (1) RECOVER BASIS OF STOCK TAX-FREE AND GET CAPITAL GAIN TREATMENT ON EXCESS
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(2) CORPORATION MAY BE ONLY BUYER FOR STOCK (3) DO NOT WANT TO CREATE OUTSIDE OWNERSHIP (BUY-SELL AGREEMENT) (4) LOAN AGREEMENTS OF CORPORATION MAY REQUIRE CHANGE IN DEBT-EQUITY RATIO (5) DISCORD AMONG SHAREHOLDERS (PUBLICLY TRADED CORPORATIONS OFTEN DO STOCK REDEMPTIONS TO INCREASE THE VALUE OF THE SHAREHOLDERS' STOCK) IF PROPERTY IS GIVEN TO SHAREHOLDER (INSTEAD OF CASH), THE SALES PRICE ABOVE IS THE AMOUNT OF THE FAIR MARKET VALUE (FMV) OF THE PROPERTY DISTRIBUTED BASIS TO SHAREHOLDER IN PROPERTY RECEIVED FOR SALE OF STOCK IS FMV ON THE DATE OF THE REDEMPTION (HOLDING PERIOD BEGINS ON DATE OF REDEMPTION) (2) FIVE (5) TYPES OF STOCK REDEMPTIONS (1) NOT ESSENTIALLY EQUIVALENT TO
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A DIVIDEND (302(b)(1)) (2) SUBSTANTIALLY DISPROPORTIONATE DISTRIBUTION (302(b)(2)) (3) COMPLETE TERMINATION OF SHAREHOLDER’S INTEREST (302(b)(3)) (4) PARTIAL LIQUIDATION OF SHAREHOLDER’S INTEREST (302(b)(4)) (5) TO PAY DEATH TAXES (303) STOCK ATTRIBUTION RULES (SECTION 318) SHAREHOLDER IS TREATED AS ALSO OWNING STOCK IN CORPORATION OWNED BY: (1) SPOUSE (2) CHILDREN (3) GRANDCHILDREN (4) PARENTS IF PASS ANY TEST (TYPE), TREAT AS A SALE. IF FAIL TESTS (DO NOT PASS ANY TEST), (AS IN CHAPTER 5) (IF FAIL TESTS, BASIS OF STOCK REDEEMED IS ADDED TO BASIS OF STOCK STILL OWNED (OR CONSTRUCTIVELY OWNED))
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ASSUME THE FOLLOWING FACTS FOR AN ILLUSTRATION OF A STOCK REDEMPTION: BASIS IN STOCK - $10,000 (1,000 SHARES) 200 SHARES REDEEMED FOR $15,000 IF QUALIFIES FOR REDEMPTION TREATMENT: SALES PRICE $15,000 - BASIS IN STOCK 2,000 (20% OF BASIS) = CAPITAL GAIN (LOSS) $13,000 IF DO NOT QUALIFY FOR REDEMPTION TREATMENT (IE. DO NOT PASS ANY TEST): THE SALES PRICE OF $15,000 NOW BECOMES TAXABLE DIVIDEND INCOME (ASSUMING THE BASIS IN STOCK OF $2,000 (20% OF BASIS) REMAINS WITH THE 800 SHARES OF STOCK STILL OWNED (1) NOT ESSENTIALLY EQUIVALENT TO A DIVIDEND (302(b)(1))
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MEANINGFUL REDUCTION IN SHAREHOLDER’S INTEREST (VOTING CONTROL) OF CORPORATION NO CLEAR OBJECTIVE TEST DETERMINED ON CASE BY CASE BASIS ASSUME THE FOLLOWING EXAMPLE AS AN ILLUSTRATION OF THIS TYPE OF REDEMPTION: A SOLE SHAREHOLDER WHO OWNS 100 SHARES OF STOCK AND REDEEMS 99 SHARES OF STOCK BACK TO THE CORPORATION. IS THIS A “MEANINGFUL REDUCTION IN SHAREHOLDER’S INTEREST”? THE ANSWER IS NO BECAUSE THE
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CHAPTER6-LECTURE1(ANDLECTURE2-PROBLEMS) - CHAPTER 6...

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