B If distributed property is subject to a liability in excess of basis the fair

B if distributed property is subject to a liability

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N.B: If distributed property is subject to a liability in excess of basis, the fair market value is treated as not being less than the amount of the liability (higher of FMV or liability) Constructive Dividends: Any economic benefit conveyed to a shareholder may be treated as a dividend for tax purposes, even though not formally declared Usually arises with closely held corporations Payment may be in lieu of actual dividend and is presumed to take form for tax avoidance purposes. Benefit conveyed is recharacterized as a dividend for all tax purposes o Corporate shareholders are entitled to the dividends received deduction o Other shareholders receive preferential tax rates Examples of Constructive Dividends Shareholder use of corporate property at reduced cost or no cost (company car to non- employee shareholder) Bargain sale of property to shareholder (sale for 1000 of property worth 10,000) Bargain rental of corporate property Payments on behalf of shareholder Unreasonable compensation Below market interest rate loans to shareholders High rate interest on loans from shareholder to corporation
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Stock Dividend Effect on E&P o If nontaxable, E&P is not reduced o If taxable, treat as any other taxable property distribution Basis of stock received in the hands of the shareholder o If nontaxable stock dividend If shares received are identical to shares previously owned, basis = cost of old shares/total number of shares If shares received are not identical, allocate basis of old stock between old and new shares based on relative FMV Holding period includes holding period of formerly held stock o If taxable stock dividend, basis of new shares received is FMV Holding period starts on date of receipt Deductions Requiring Special Treatment = Bond Redemptions at a Premium Repurchasing Bonds at a Premium: A corporation that repurchases its bonds may deduct as interest expense the excess of the repurchase price over the issue price
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  • Fall '14
  • fabioambrosio
  • Accounting, Dividend, Corporation, Limited Liability Company, S corporation

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