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Unformatted text preview: 6-5 Compare the tax consequences to the shareholderand the distributing corporation of the followingthree kinds of corporate distributions: ordinarydividends, stock redemptions, and completeliquidations.Ordinary dividends: The shareholder treats ordinary dividends as income adding it to the rest of their income and taxed accordingly. The corporation is taxed and then will distribute dividends out of their E&P (Anderson, Pope, & Kramer, 2011). Stock Redemptions: depending on if the redemption is treated as a sale or a dividend, if it is deemed a sale then the shareholder recognizes any gain or loss and it will be capital in character. If it is treated as a dividend then the dividend is integrated into the shareholders taxable base with the rest of their sources of income and taxed accordingly. The corporation recognizes gain (no loss) as if it had sold distributed noncash property before the redemption and the E&P is reduced by the portion of current and accumulated E&P attributable to the redeemed stock (Anderson, Pope, & Kramer, 2011). Complete liquidations: If not a controlled subsidiary, the liquidating corporation is taxed as though it sold its assets recognizing a gain or loss on the distribution of property to its shareholders. The shareholders receiving the liquidation distribution as an amount received in exchange for his stock. The shareholder recognizes a capital gain or loss equal to any money received plus the FMV of any property received over the adjusted basis of his stock (Anderson, Pope, & Kramer, 2011). 6-9 Explain the circumstances in which a liquidatingcorporation does not recognize gain and/or losswhen making a liquidating distribution.A liquidating corporation does not recognize a gain or loss on a liquidating distribution if the corporation is being liquidated under section 332 rules. This allows for a parent corporation to liquidate its subsidiaries, as long as the parent corporation owns 80% of a voting stock and classes of stock, and reorganize without undue tax consequences. A liquidating corporation recognizes gain but not a loss on liquidating distributions made to minority shareholders when Sec. 332 rules apply to the parent corporation. Loss recognition is disallowed when the liquidating corporation makes a distribution to a related person, as defined in Sec. 276(b), if (1) the distribution is not pro rata or (2) the property distributed is disqualified property. Disqualified property is property acquired by the corporation in a Sec. 351 tax-free formation or as a capital contribution during the five-year period ending on the distribution date or property having an adjusted basis that carries over from a disqualified property....
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- Spring '11