UCLAOLCTclass3 - Taxation of Corporations and Shareholders...

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Taxation of Corporations and ShareholdersWeek 3© Mark S. Hoose
Agenda – Week 31.Overview – cash and property distributions by corporations2.Earnings and profits (“E&P”)3.Dividend relief4.Property distributionsa)Impact on distributing corporationb)Impact on E&Pc)Impact on shareholders5.“Constructive” Dividends
Overview – Corporate Distributions
The whole question – what happens when Corp X distributes money or property to me because I am a shareholder?
Sec. 301 – the rulesSection 301 deals with distributions by corporations to shareholders “with respect to its stock”. These rules do NOT apply to interest or salary payments made by corps, or to distributions in EXCHANGE for stock (redemptions)What are the rules?1.Sec. 301(b) – tells you the amount of the distribution, which is:1.The amount of cash, if the distribution is cash2.Generally, the FMV of the property distributed (reduced by any liabilities assumed by the shareholder2.Sec. 301(c) – determines tax treatment of the distribution:a) 301(c)(1) – distributions out of “earnings and profits” are a dividend, taxable to shareholder and NOT deductible to corporaitonb) 301(c)(2) – if not a dividend, firsta return of capital, andc)301(c)(3) – then any remaining amount is capital gain
Overview – Corporate DistributionsTake the example on p. 85 – I put $50k into Corp X, and Corp X makes $20k in earnings and profits (“E&P”) in year 11.What if Corp X distributes $20k to me at the end of year 1?
dividendbecause it is out of E&P,
b)NOT deductible to Corp X (double taxation)2.What if instead Corp X paid $30,000 to me?
reducing my basis in the Corp X stock from $50k down to $40k3.What if instead Corp X paid $75,000 to me?

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