Chap 15 - Chapter 15 Corporate Nonliquidating Distributions...

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Chapter 15 Corporate Nonliquidating Distributions 1 ©2011 CCH. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 1 800 248 3248 www.CCHGroup.com
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2 of 119 Dividend Distributions Most corporations pay dividends on both common and preferred stock Tax status of distribution to shareholders affected by distributing corporation’s earnings Dividend to extent that it is made from distributing corporation’s E&P for current tax year or E&P accumulated since March 1, 1913 Dividends included in gross income Taxed at reduced rates Chapter 15, Exhibit 1a
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3 of 119 Dividend Distributions Distributions in excess of corporation’s Applied against shareholder’s AB in stock Nontaxable and reduce AB (but never less than zero) Once AB is zero, excess treated as gain from sale or exchange of stock Chapter 15, Exhibit 1b
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Dividend Distributions - Example West Co. has three equal shareholders (SH): Gary, Ellen and Justin West Co. distributed $20,000 to each SH SH information follows: Gary Ellen Justin AB in stock $15,000 $5,000 $3,000 Holding period LT LT ST What are the effects of the distribution on each SH? 4 of 119 Chapter 15, Exhibit 2a
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Dividend Distributions - Example Since West Co.’s E&P is $39,000, each SH has a $13,000 dividend and a $7,000 return of capital SH effects follow: Gary Ellen Justin Dividend $13,000 $13,000 $13,000 Nontaxable return of capital $7,000 $5,000 $3,000 New AB in stock $8,000 $0 $0 Recognized gain $0 $2,000 LT $4,000 ST 5 of 119 Chapter 15, Exhibit 2b
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6 of 119 Earnings and Profits E&P not defined in the Internal Revenue Code Code Sec. 312 provides an indication of how certain transactions affect E&P E&P is a measure of a corporation’s economic capacity to pay a dividend Chapter 15, Exhibit 3a
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7 of 119 Earnings and Profits Distributions First out of current E&P Then out of accumulated E&P since March 1, 1913 Corporation annually adds to accumulated E&P to extent that it does Chapter 15, Exhibit 3b
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8 of 119 Earnings and Profits - Example New Co. was formed on January 1, 2010. 2010: $25,000 $0 $5,000 2011: -$41,000 ? $0 2012: $30,000 ? $3,000 2013: $3,000 ? $5,000 Chapter 15, Exhibit 4a
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9 of 119 Earnings and Profits - Example New Co. was formed January 1, 2010. Distribution 2010: $25,000 $0 $5,000 2011: -$41,000 $20,000* $0 2012: $30,000 -$21,000** $3,000 2013: $3,000 $6,000*** $5,000 *$0 + $25,000 - $5,000 = $20,000 **$20,000 - $41,000 = -$21,000 ***-$21,000 + $30,000 - $3,000 = $6,000 Accumulated E&P on 1/1/2014 is $4,000: ($6,000 + $3,000 - $5,000 = $4,000) Chapter 15, Exhibit 4b
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Chap 15 - Chapter 15 Corporate Nonliquidating Distributions...

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