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Unformatted text preview: 6-1Chapter 6 Corporate Redemptions and Liquidations (2012 edition) updated: August 10, 2011Learning Objectives: •Be able to identify & understand the tax treatment of stock redemptions that are treated as sales/exchanges of stock – qualified stock redemptions. •Be able to identify & understand the tax treatment of stock redemptions that are treated as dividend distributions – nonqualified stock redemptions. •Understand the general rules for the complete liquidation of a corporation. •Understand the special rules for the liquidation of controlled subsidiary into the parent. I. Stock Redemptions (Nonliquidating Distributions) – In General A. Nonliquidating stock redemptions – acquisition by a corporation of its own stock from a shareholder in exchange for cash or other property, whether or not the stock is canceled, retired, or held as treasury stock (liquidating distributions will be covered later; starting on page 6-12). Conceptually, there are two views on how stock redemptions should be taxed. 1. Is it similar to the sale of stock to any unrelated third party? Under this view, the taxpayer would use the amount distributed by the corporation & their basis in the stock to compute gain or loss from the sale of a capital asset (i.e., sale/exchange treatment = a return ofyour investment). or 2. Is it no different than any other dividend distribution? Under this view, the taxpayer would treat the entire amount distributed by the corporation as a taxable dividend from corporate E & P (i.e., dividend treatment = a return fromyour investment). B. The basic tax question: Is it a qualifiedstock redemption or a nonqualifiedstock redemption? In order to get sale/exchange treatment, the tax law looks for some “meaningful” reduction in the shareholder’s ownership interest relative to other shareholders (single-owner corporations can never get sale/exchange treatment). 6-2C. Once you determine whether the distribution will be treated as a qualified stock redemption (sale/exchange) or a nonqualified stock redemption (dividend), you can answer the following questions: 1. What is the shareholder’s recognized gain or loss? 2. What is the character of the gain or loss? 3. What is the effect on the shareholder’s basis in the remaining stock? 4. What is the shareholder’s basis in the property received? 5. Does the corporation recognize any gain or loss? 6. What is the effect on the corporation’s E & P? D. Conflicting preferences – also be aware that corporate shareholders and noncorporate shareholders may have different preferences. 1. noncorporate shareholders often prefer the sale/exchange treatment arising from a qualified stock redemption – taxpayer gets to use basis to reduce the amount of the gain and receives favorable capital gain treatment, while 2. corporate shareholders often prefer dividend treatment, because the 70/80% dividends received deduction (DRD) results in only a small portion of the dividend being taxed. portion of the dividend being taxed....
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