UCLAOLCTclass6 - Taxation of Corporations and Shareholders...

This preview shows page 1 - 8 out of 16 pages.

Taxation of Corporations and ShareholdersWeek 6© Mark S. Hoose
Agenda – Week 61.Stock dividends – sec. 3052.Sec. 306 – “tainted” stock3.Corporate Liquidations
Stock DividendsCorp XCorp XCommonstockAssume I own 100 common shares of Corp X, out of 1000 shares outstanding, with a basis of $200 ($2 per share)And then Corp X issues me 100 more common sharesAny tax result? It dependsIt depends on what everybody else gotIf all other common shareholders also got a 100% stock dividend, then there is no tax result, per sec. 305(a) – no income inclusionPer sec. 307, my $200 basis in my shares gets spread out over my now 200 shares (now $1 per share is my basis)And Corp X’s E&P is unaffected by this distribution
Sec. 305 – the rulesGeneral rule – sec. 305(a) says stock dividends are not taxableBut sec. 305(b) has 5 major exceptions to this rule:1.Sec. 305(b)(1) – in lieu of money2.Sec. 305(b)(2) – disproportionate distributions3.Sec. 305(b)(3) – distributions of common and preferred4.Sec. 305(b)(4) – distributions on preferred5.Sec. 305(b)(5) – distributions of convertible preferredIf the exceptions apply, then sec. 301 applies to the distribution, which is treated as a distribution of propertyRecall under sec. 301 that the distribution is a dividend to the extent of the corporation’s current or accumulated E&PAnd then a return of basis, and then capital gain
Sec. 305(c)Corp XMy stock in Corp X can have many legal terms, such as a conversion ratio (ie terms for converting the stock from one “class” to another) and redemption price (price at which Corp X promises to redeem it)A change in these terms can have the effect of a sec. 301 dividend – see p. 166 of the bookSec. 305(c) recognizes this, and taxes certain of these changes as a potential sec. 301 dividendThis is an advanced topic, so don’t worry about it for purposes of our final examStock
Sec. 306 – “Tainted” StockCorp XPreferredStockdistributionSay I own 100 common shares of Corp X with a basis of $200, and Corp X has $10,000 of E&P and 1000 shares outstandingCorp X then issues a pro rata dividend of 100 preferred shares to me (1 preferred share for each common

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture