air market value is treated as not being less than the amount of the liability

Air market value is treated as not being less than

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air market value is treated as not being less than the amount of the liability (higher of FMV or liability).
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Constructive Dividendssquare6Any economic benefit conveyed to a shareholder may be treated as a dividend for tax purposes, even though not formally declaredsquare6Usually arises with closely held corporationssquare6Payment may be in lieu of actual dividend and is presumed to take form for tax avoidance purposesfor tax avoidance purposessquare6Benefit conveyed is recharacterized as a dividend for all tax purposesrhombus6Corporate shareholders are entitled to the dividends received deductionrhombus6Other shareholders receive preferential tax rates
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Examples of Constructive Dividendssquare6Shareholder use of corporate property at reduced cost or no cost (e.g., company car to non-employee shareholder)square6Bargain sale of property to shareholder (e.g., sale for $1,000 of property worth $10,000)Bargain rental of corporate propertysquare6Bargain rental of corporate propertysquare6Payments on behalf of shareholder (e.g., corporation makes payments to satisfy obligation of shareholder)square6Unreasonable compensationsquare6Below market interest rate loans to shareholderssquare6High rate interest on loans from shareholder to corporation
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Stock Dividends square6Effect on E & Prhombus6If nontaxable, E & P is not reducedrhombus6If taxable, treat as any other taxable property distribution (i.e., reduce E&P)square6Basis of stock received in the hands of the shareholderIf nontaxable stock dividendrhombus6If nontaxable stock dividendpentastar2If shares received are identical to shares previously owned, basis = (cost of old shares/total number of shares)pentastar2If shares received are not identical, allocate basis of old stock between old and new shares based on relative fair market valuepentastar2Holding period includes holding period of formerly held stockrhombus6If taxable stock dividend, basis of new shares received is fair market valuepentastar2Holding period starts on date of receipt
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Other Considerations
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Dividends Received Deduction<DRD Maximum:DRD:% Ownership (Value and Voting)Dividends Received Deduction (DRD)Dividends received from other corporations are included by both corporate and individual shareholders, but deductible only by corporate shareholders within limits explained below.“Affiliated” means owning 80% of both voting power and value of stock.100% ATI100% div. received---80% & affiliated80% ATI80% div. received80%20%70% ATI70% div. received20%---<
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FACTS: C Corp. has the following income and expenses:Operating Revenue800,000COGS(300,000)Operating expenses(520,000)Dividends Received Deduction—ExampleOperating expenses(520,000)Other income (dividends received froma 25%-owned corp.)100,000 Chapter 16, Exhibit 10b
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Dividends Received Deduction—ExampleSince 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).
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