IG_ch 06 - CHAPTER 6 CORPORATIONS: REDEMPTIONS AND...

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CHAPTER 6 CORPORATIONS: REDEMPTIONS AND LIQUIDATIONS LECTURE NOTES SUMMARY OF CHANGES IN THE CHAPTER The following are notable changes in the chapter from the 2008 Edition. For major changes, see the Preface to the Instructor’s Edition of the text. News Boxes Added Tax in the News titled Capital Restructuring by Charles Schwab Results in Redemption of 102 Million Shares . Replaced Tax in the News titled IRS Withdraws Proposed Regulations on Basis Shifting Amid Criticism with a new article titled Ketchup Giant Suffers Defeat in Basis Shifting Case . Replaced Tax in the News titled Section 162(k) Final Regulations Preclude Deduction for ESOP Redemptions with a new article titled District Court Rules § 162(k) Disallows Deduction for ESOP Redemptions . Deleted Tax in the News titled Withholding Tax Requirements for Nonresident Alien Shareholders Redeeming Stock in Tender Offers . Ethical and Equitable Considerations Added Ethical and Equitable Consideration titled Transferee Liability for Tax Deficiency of Liquidated Corporation . Deleted Ethical and Equitable Consideration titled Reporting Business Activities— Liquidation Consequences? Text Changes Tax rate for dividends and capital gains for some taxpayers is 0% for 2008 - 2010. OVERVIEW 1. Redemptions. a. Corporate nonliquidating distributions to shareholders are typically treated as dividend income. However, distributions that qualify as stock redemptions are treated the same as a sale of stock by the shareholders to a third party. Thus, capital gain treatment normally results. 6-1
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6-2 2009 Annual Edition/Instructor’s Guide with Lecture Notes b. Qualifying stock redemptions provide more tax benefit to noncorporate share- holders than nonqualifed redemptions. (1) Since qualifying stock redemptions are treated as sales or exchanges, the shareholders can offset their amount realized by the basis of the stock redeemed. Any gain remaining is treated as a capital gain and taxed at the applicable capital gain rates (long-term rates are 0% or 15%). (2) If the distributions do not qualify as stock redemptions, they are treated as dividend income (assuming adequate E & P) and taxed at dividend rates (currently 0% or 15%). (3) By increasing the amount of capital gains for the year, redemptions may increase the utilization of capital losses from other sources. Distributions treated as dividends cannot provide this same benefit. c. Corporate shareholders prefer nonqualified stock redemption (dividend treatment). (1) With dividend treatment corporate shareholders receive the benefits of the dividends received deduction, most of the nonqualified stock redemption income is not taxable. (2)
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This note was uploaded on 04/01/2011 for the course ACCT 730 taught by Professor Tom during the Spring '11 term at Davenport.

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IG_ch 06 - CHAPTER 6 CORPORATIONS: REDEMPTIONS AND...

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