C12-Chp-06-1C-Lecture-Slides-2012

C12-Chp-06-1C-Lecture-Slides-2012 - Chapter 6C Lecture...

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1 Chapter 6C. Lecture Slides Howard Godfrey, Ph.D., CPA Professor of Accounting Edited February 19, 2012 Copyright 2012
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2 301 Corporate Distributions [Sec. 301-318, 336(b)] a Distribution of property [§ 317(a)] is treated as described in subsec.( c) b 1. Amount of distribution is money plus FMV of property 2. Amount of distribution is reduced by debt on property distributed 3 FMV is determined in date of distribution c If section 316(a) applies, 1. Amount that is dividend under Sec. 316 (from E&P) included in income. 2. Amount that is NOT dividend under Sec. 316 (from E&P) reduces basis. 3. A. If return of capital distribution exceeds basis, excess is gain on sale. d Basis for property received under §301(a) is FMV 317 What is Property? (distribution under Sec. 301) a Property includes money, securities, other property, but not stock in corp. 316 Dividend Defined (Dividend is out of E&P). a This Subtitle, "dividend" means a distribution of prop. to shareholders 1. Out of E&P accumulated after February 28, 1913. 2. Out of E&P accumulated in taxable year (not considering distribution). Every distribution is made out of the most recently accumulated E&P.
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3 Redemption - sale by stockholder? a Sec. 301 (dividend treatment) except for four redemptions. b 1 Redemption not essentially equivalent to div. 2 Substantially disproportionate distribution 3 Termination of shareholder's interest [can avoid stock attribution rules ( c)(2) 4 Redemption in a partial liquidation c 1 Stock attribution rules apply 2 Attribution rules may NOT apply for ( c)(3) Redemption - to pay death taxes Exchange treatment - redemption to pay Death Taxes 302 303
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4 Corp. shareholders like dividend income. Individuals like capital gains. Why? Pg. 6-3, Sec. 245 Buys 2,000 shares Shares 2,000 Cost per share is $40 Cost/Share $40 Total cost of 200 shares Total Cost $80,000
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5 LOCAL Corp. makes cash distribution of $50,000 to Bob. Bob reports: ___
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6 Bob sells 1,000 shares for $50 per share Assume exchange treatment (Sec. 1001) Shares 1,000 Price per share Price/share $50 Total selling price Selling Price $50,000 Total cost Cost $40,000 Gain Bob reports Gain $10,000
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7 LOCAL Corp. redeems 1,000 of Bob's shares. LOCAL pays Bob $50 per share. Number of shares Shares 1,000 Redemption price Price/share $50 Amount Bob received Total $50,000 Assume "Dividend Treatment." Local distributes $50,000 Bob reports
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8 LOCAL Corp. redeems 1,000 of Bob's shares. LOCAL pays Bob $50 per share. Number of shares Shares 1,000 Redemption price Price/share $50 Amount Bob received Total $50,000 Assume "Dividend Treatment." Local distributes $50,000 Bob reports Div. Income $50,000
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9 Assume "Exchange Treatment." Local pays Bob $50,000 for Bob's stock. Number of shares No. Shares 1,000 Bob's cost per share Cost/share $40 Cost of shares sold Total Cost $40,000 Total selling price Selling Price $50,000 Bob reports Cap. Gain $10,000 Name five types of redemptions that get exchange treatment. See first slide
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10
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11 Mr. Boss owned all of stock with basis of $500,000.
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