Reduces E P by FMV of property distributed or basis if greater less liabilities

Reduces e p by fmv of property distributed or basis

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Reduces E & P by FMV of property distributed (or basis, if greater) less liabilities on the property N.B.: If distributed property is subject to a liability in excess of basis, the f air market value is treated as not being less than the amount of the liability (higher of FMV or liability).
Constructive Dividends square6 Any economic benefit conveyed to a shareholder may be treated as a dividend for tax purposes, even though not formally declared square6 Usually arises with closely held corporations square6 Payment may be in lieu of actual dividend and is presumed to take form for tax avoidance purposes square6 Benefit conveyed is recharacterized as a dividend for all tax purposes rhombus6 Corporate shareholders are entitled to the dividends received deduction rhombus6 Other shareholders receive preferential tax rates
Examples of Constructive Dividends square6 Shareholder use of corporate property at reduced cost or no cost (e.g., company car to non-employee shareholder) square6 Bargain sale of property to shareholder (e.g., sale for $1,000 of property worth $10,000) Bargain rental of corporate property square6 square6 Payments on behalf of shareholder (e.g., corporation makes payments to satisfy obligation of shareholder) square6 Unreasonable compensation square6 Below market interest rate loans to shareholders square6 High rate interest on loans from shareholder to corporation
Stock Dividends square6 Effect on E & P rhombus6 If nontaxable, E & P is not reduced rhombus6 If taxable, treat as any other taxable property distribution (i.e., reduce E&P) square6 Basis of stock received in the hands of the shareholder If nontaxable stock dividend rhombus6 pentastar2 If shares received are identical to shares previously owned, basis = (cost of old shares/total number of shares) pentastar2 If shares received are not identical, allocate basis of old stock between old and new shares based on relative fair market value pentastar2 Holding period includes holding period of formerly held stock rhombus6 If taxable stock dividend, basis of new shares received is fair market value pentastar2 Holding period starts on date of receipt
Other Considerations
FACTS: C Corp. has the following income and expenses: Operating Revenue 800,000 COGS (300,000) Operating expenses (520,000) Dividends Received Deduction—Example Other income (dividends received from a 25%-owned corp.) 100,000 Chapter 16, Exhibit 10b
Dividends Received Deduction—Example Since C corp owns 25% of the corporation from which it received the $100,000 dividend, it would normally be able to deduct 80% of the dividend received (or $80,000). However, the Dividend Received Deduction is also limited to 80% of ATI. ATI: ($800,000 + 100,000) – (300,000+520,000) = $80,000 Therefore, the Dividend Received Deduction is limited to $64,000 (80% of $80,000 ATI).

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