Land at distribution FMV 60000 AB 5000 Mortgage 10000 Assume that Any Corps

Land at distribution fmv 60000 ab 5000 mortgage 10000

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Land at distribution: FMV = $60,000 AB = $5,000 Mortgage = $10,000 Assume that Any Corp.’s current and accumulated E&P $2 and $18, respectively, after including the effects of the distribution on it Joe’s AB in stock = $20,000 (and he has held the stock for three years) What are the effects of the distribution to Any Corp. and Joe? Chapter 15, Exhibit 24a
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CCH Federal Taxation Comprehensive Topics 39 of 119 Property Distributions - Example 1 Any Corp. Recognized gain = $55,000 LT ($60,000 - $5,000) E&P: ↑$55,000 (appreciation) ↓$50,000 ($60,000 - $10,000 = FMV – mortgage) Joe: Measure of distribution = $60,000 - $10,000 = $50,000 Dividend = $20,000 (sum of current and accumulated E&P) Return of capital = $30,000 $20,000 = reduction in basis in stock to zero $10,000 = LTCG Basis in land = $60,000 (FMV) Chapter 15, Exhibit 24b
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CCH Federal Taxation Comprehensive Topics 40 of 119 Property Distributions - Example 2 Any Corp. distributed land to its SH (Joe) Land is a long-term capital asset to Any Corp. Land at distribution: FMV = $60,000 AB = $5,000 Mortgage = $70,000 Assume that Any Corp.’s current and accumulated E&P $2 and $18, respectively, after including the effects of the distribution on it Joe’s AB in stock = $20,000 (and he has held the stock for three years) What are the effects of the distribution to Any Corp. and Joe? Note: This is the same as example 1 except the mortgage has increased to $70,000 Chapter 15, Exhibit 25a
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CCH Federal Taxation Comprehensive Topics 41 of 119 Property Distributions - Example 2 Any Corp. Recognized gain = $65,000 LT ($70,000 - $5,000) E&P: ↑$65,000 (appreciation) ↓$0 ($70,000 - $70,000 = FMV – mortgage) Joe: Measure of distribution = $70,000 - $70,000 = $0 Dividend = $0 Basis in land = $60,000 (FMV) Chapter 15, Exhibit 25b
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CCH Federal Taxation Comprehensive Topics 42 of 119 Constructive Dividends Occurs when no formal (actual) cash or property dividend has been declared or paid Dividend can result from a variety of transactions (unintentional or intentional) IRS declares dividend has occurred Economic substance of transaction takes precedence over its form Chapter 15, Exhibit 26
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CCH Federal Taxation Comprehensive Topics 43 of 119 Most Frequent Constructive Dividends Unreasonable compensation and disallowed expenses Corporate satisfaction of shareholder liabilities Shareholder loans Corporate loans Free personal use of corporate property Bargain sales and rentals to shareholder or persons related to shareholder Premium sales and rentals to corporation Chapter 15, Exhibit 27
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CCH Federal Taxation Comprehensive Topics 44 of 119 Tax-free Stock Dividends In general, if shareholders receive stock in proportion to their ownership interest, then they dividends are not taxable In same economic position after distribution as were prior to it If the stock dividend is not taxable Total basis of old stock is allocated between old and new stock Holding period of new stock takes on the holding period of old stock If old shares and new shares are not identical, total basis of old shares is allocated to old and new shares based on their relative FMVs Holding period for old and new shares refers back to original (old) shares Chapter 15, Exhibit 28
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