corporate tax notes test 2 R

corporate tax notes test 2 R - NOTES TEST 2 SECTION 306 •...

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Unformatted text preview: NOTES TEST 2 SECTION 306 • In case of sale of section 306 stock, the shareholder generally has OI on the sale = to the FMV of the preferred stock on the date of the stock dividend. 1. OI is treated as a dividend for purposes of the 15 % or 0% maximum tax rate on dividend income but has no effect on the issuing corporation’s E&P 2. No loss is recognized on the sale of P/S; the uncovered bases in P/S sold is added to the bases of the shareholder’s C/S. • In case of a redemption of section 306 stock, the issuing corporation redeems the P/S from the shareholder, the redemption proceeds constitute dividend income to the extent of the corporation’s E&P • Section 306 stock is stock other than common that 1. Is received as a nontaxable stock dividend 2. Is received tax free in a corporate reorganization or separation to the extent that either the effect of the transaction was substantially the same as the receipt of a stock dividend or the stock was received in exchange for section 306 stock, or 3. Has a basis determined by reference to the basis of 306 stock. If a corporation has no E&P on the date of distribution of a nontaxable P/S dividend, the stock will not be section 306 EXAMPLE: On December 15, 19-5 Gangrene Corporation distributed 10,000 shares of newly created preferred stock on its common stock (only class outstanding). At the time of the distribution, accumulated earnings and profits of the corporation were $500,000 and the fair market value of the preferred stock was $100,000. Kami Kage Gordon, who owned 200 shares of the common stock of Gangrene Corporation, these shares having cost him $10,000, received 500 shares of the Gangrene preferred stock. After the distribution, his common stock was worth $15,000 and the preferred stock was worth $5,000. State the amount and character of the income Gordon must report on the occurrence at July 1, 19-6 of the following alternative events and the basis of the common stock remaining in his hands: 1. He sells all of his preferred stock to Cataract Jones, who is unrelated, for $6,000. FMV of P/S = $5000; OI= $5000 2. He sells all of his preferred stock to Jones for $8,000. FMV= 5000 OI=5000 Return on capital= 2500 LTCG= 500 (7500 goes to P/S = 5000+2500) 3. He sells 250 shares of his preferred stock to Jones for $3,000. OI= 2500 ROC= 500 4. All of his preferred stock is redeemed by Gangrene Corporation for $6,000. Assume earnings and profits are still $500,000. OI = 6000 no ROC LTCG 0 5. Suppose on December 15, 19-5 there were two classes of stock outstanding in (1) above. We don’t have section 306 meaning that we are taxing it 4A E&P= 5000 P/S redeemed 6000 OI= 5000 ROC=1000 LTCG=00 4B E&P=5000 Redemption = 8000 OI=5000 ROC=2500 how much you have in P/S LTCG=500 all has to add up to 8000 NOTES TEST 2 SECTION 304 • A shareholder possessing a controlling interest in 2 / more corporations could obtain a sale or exchange treatment by having one corp purchase some of the shareholder’s stock...
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This note was uploaded on 04/05/2012 for the course ACCT 4221 taught by Professor Crumbley,d during the Spring '08 term at LSU.

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corporate tax notes test 2 R - NOTES TEST 2 SECTION 306 •...

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