This action might not be possible to undo. Are you sure you want to continue?
-Overview: -C Corporations: Subchapter C governs corporations. -S Corporations: corps that meet req’s and make election (Subchapter S). -C Corp. v. S Corp. -C Corp. is treated as separate taxable entity; -whereas S Corp. is not separate taxable entity. -EX: 1 million earnings (taxable income). -C Corp. pays taxes on 1 million (Sec. 11 governs tax rates). -Tax Liability of 340k. -Then C Corp. distributes after-tax cash of 660k to Shareholders. -Now, SH’s pay taxes on 660k (dividends, which get special treatment of 15% - 1(h)). -thus, tax liability of 99k. -meaning, total taxes of 439,000 (or 43.9%). -we have double taxation. -S Corp. does not pay taxes, but instead SH’s pay taxes on 1 million TI. -S Corp. is “pass through entity” for taxes. -So, individual SH’s pay taxes on 1 million. Assuming 35% rate means taxes paid = 350k (35%). -these taxes are paid regardless of distribution. -so, there is no double taxation. -Surtaxes: purpose is to offset benefit of lower tax rates. C Corporation is a separate tax entity. -so, 1st taxed at entity level (that is the corporate level, Sec. 11(b)). -then, 2nd taxed when distributed; taxed at preferential rate of 15% until 2011. Qualified Personal Service Corporation -always flatly taxed at 35%. 11(b)(2). -EX: law firm owned by lawyers, or doctors office owned by doctors. Subchapter K -governs partnerships. -partnership is treated as a “pass through entity” for tax purposes. What is a Corporation under Income Tax? -Sec. 7701(a)(3) defines Corporation to include corp. under state law, associations, jointstock companies, and insurance companies. -Reg. 301.7701-2 provides that a business entity with 2 or more members is classified as either a partnership or corporation.
2 Traditional 4 Factors for Corporation: 1. Centralized Management -looks to see if corp. is ran by mangt. on behalf of owners. -so, SH’s do not run business. -in p-ship, the owners usually run the business. 2. Continuity of Life -b/c corp. lasts forever, it lasts despite death of SH. -whereas, p-ship dies when partner dies. 3. Limited Liability -SH’s are not personally liable for debts of corp. 4. Free transferability of interests -SH’s are free to buy and sell stock w/out consent of other SH’s. -whereas, in p-ship partners must give consent to sell p-ship interest. *need 3 of 4 to be treated as corp. -BUT b/c of LLC’s this 4 Factor Test is no longer the end-all, be-all test to determine whether it is a corp. So, this test is no longer relevant. NOW, the IRS has a much simpler classification system to determine what is a corp. -Basically, it is the “Check-the-Box” Regulation. Is it a Corporation: The Steps: 1st step is to determine if you have a Business Entity. -Reg. 301.7701-2(a) defines business entity; it is very broad (includes Business Trust). -but does not include REIT, Ordinary Trusts, Estates, or other specially regulated entities. -what about Business Trusts? -Reg. 301.7701-4: Business Trust is option for business entity under state law. -owners of business are beneficiaries. 2nd step is to determine if Business Entity is a Per Se Corporation. -Reg. 301.7701-2(b) defines per se corp. -(b)(1) corporation created under state law. -(b)(4)/(5): Banks and insurance companies are automatically corp. for federal tax purposes. -(b)(7): publicly traded partnerships. Sec. 7704. 3rd step is eligible entity. -an eligible entity is permitted to decide if it wants to be treated as a corporation or as a partnership. -if no election is made, then default rules apply. -Reg. 301.7701-3 Check the Box regulation.
3 -Domestic Eligible Entity -2 + Owners of Domestic Business Entity, default rule is that entity is treated as a partnership. -BUT have election to treat as corp. -1 Owner of Domestic Business Entity, default rule is that entity is disregarded. Meaning, Owner reports income and takes deductions on own tax return. -BUT have election to treat as corp. Chapter 2, Section 1 Problems Problem 1: Sec. 7704(a): are the interests readily tradeable on a secondary market b/c facts do say that interests are freely assignable? -is the market the LLC interests being traded on substantially the equivalent of a secondary market. Sec. 7704(b)(2)? -doubtful though b/c although interests are freely transferrable, the market forces for re-sale are limited, so not per se corporation. -is this LLC an association b/c if yes then corporation. 7701(a)(3) and Reg. 301.7701-2(b) (2). -LLC has right to elect to be treated as corp. Reg. 301.7701-3(b). Answer: Eligible Entity b/c not a per se corporation. As a result, the LLC is by default treated as a p-ship, but has right to elect to be treated as corp. Reg. 301.7701-3. -BUT note under old 4 Factors, this corp. is probably a corporation. -Remember if publicly traded business, then it’s a C Corporation. Problem 2: (a) the Corp. may offset the losses with the net income. So, Corp. has 1 million net income. i. This is so b/c a single member LLC that is a disregarded entity provides a corporation with a vehicle to insulate other assets against the risks of the business in the LLC while allowing the corporation to offset losses from one line of business against profits from another line of business on its federal tax return. Page 44. ii. NOTE: Rabbit Battery will be treated as a corporation b/c it is a per se corp. since it was created under state law as a corp. 1. remember have to pass per se corp. to take eligible entity test. iii. How will the 2 LLC’s be treated? 1. either as a disregarded entity or elect to be a corp. 301.77013. a. So: Basically default is to treat the Corp. as earning and deducting w/e LLC did. iv. Why might Corp. want to be set up this way? 1. b/c of limited liability, it insulates creditors from going after both LLC’s. (b) In problem, RB, Inc. 100% owns CD, Inc. AND RB owns 80% of MR, LLC and
1. thus default is that this is a pship. -HOWEVER.4 million). has subsidiary Corp. The thing is that RB. as long as owner has economic interest in company. Inc. is a subsidiary. LCC’s earnings (which is 600k). wholly owns LLC. then losses can offset gains. CD. This is b/c the LLC is not a single member (not wholly owned by the corporation).4 CD. i. Inc’s losses to offset. And. and CD. Answer: CD. CD. may file a consolidated return. *What if we change the facts. -as a result. Inc. basically: -we disregard business entity when Corp. and make it so that CD is an LLC? -now CD. so no disregarded entity. it is deemed an owner. 1. -but we don’t disregard business entity when Corp. the LLC is owned by 2 owners (RB. LLC’s earnings (which is 2. So. cannot use CD. iii. LLC is a disregarded entity for tax purposes. takes full loss and get 20% of MR. Inc. LLC for tax purposes. Inc. Inc. is a per se corporation. ii.) a. Corp. Regard and Disregard of the Corporate Entity . RB gets 80% of MR. we can offset losses and gains. does not wholly own LLC and when Corp. INC. 2. Inc. RB is treated as directly owning all assets of MR. owns 20% of MR. Meaning. Can’t use subsidiary’s losses to offset. LCC.
whether the corp. If the corp. -also. its relations with its principal must not be dependent upon the fact that it is owned by the principal. the Corp. 1988) -Facts: -TP argues that the Corp. 1. the owner can always terminate or alter agent. -the threshold for business purpose or activity is low. was created to avoid the state usury laws (allow to get higher interest rate). is wholly owned by one SH is not enough to disregard taxable entity. Ct. Comm’r v. RA of Factors to Bollinger Case: -1-4 Factors are not at issue (thus are satisfied). operates in the name and for the account of the principal. to avoid usury laws so agency arg. 4. 1976) -Facts: -a p-ship creates a Corp. -Bollinger said arms-length relationship is not required. but there still must be unequivocal evidence that agency relationship . 3. case that held that a Corp. is a corporation. could act as an agent of TP (SH). which was controlled by mortgagee. the SH’s are stuck with the corporate form they chose. -Rule: if Corp. 5. whether the corp. binds the principal by its actions. is purely passive or is used for tax-avoidance purposes. -the fact the Corp. National Carbide Factors: -S.5 Moline Properties Doctrine -Facts: -SH puts R/E in newly formed Corp. is created for a business purpose or if it conducts any business activity. -Factor 6: Principal represented selves as owner to all relevant parties and the Corp. there is no req’t to pay fee to agent. -holding: yes. 6. separate taxable entity. -the corp. SH then put stock into Voting Trust. -Holding: Corp. the taxable entity is disregarded. -really the Partnership was really the lender but Corp. was holding property as an agent of P-ship. for the purpose of obtaining a loan. whether receipt of income is attributable to the services of employees of the principal and to assets belonging to the principal. whether corp. will be treated as a separate taxable entity. transmits money received to the principal. is a true agent. is a separate taxable entity. Bollinger (S. Strong v. Ct. Ct. -Factor 5: yes. Comm’r (Tax Ct. is ok b/c yes normal activity. was created just to avoid usury laws. -generally though if corp. created to avoid usury laws was an agent of the TP. Its business purpose must be the carrying on of the normal duties of an agent. This was done to get loan. 2. -Applying Moline Properties Doctrine: -the corp’s purpose and activities were sufficient to require recognition of its separate ownership of property as a separate taxable entity. said that this was common practice to use Corp.
Corp. Bollinger: 3 Factors proving Unequivocal Agency Relationship: 1. 3. to avoid usury laws and not be separate taxable entity. as agent is same as disregarding corporate entity. there is no separate taxable entity b/c of the agency relationship. -no one sees agent as actual owner. Chapters 1&2: Identifying Taxable Corporate Entities. Written Agency Agreement at time Agent acquires asset. 2. state that the corp. is acting as agent of SH/principal/p-ship. etc. functions as an agent of principal (SH). is held out as agent of principal (SH). both the Bollinger and the National Carbide Factors.6 existed at the beginning of relationship. Corp. Holding in Bollinger: the effect of treating Corp. So. -that is all relevant parties know of agency rel. Review -Corporations . -basically. Most Courts look at all factors.
7 -Subchapter C -Subchapter S -Special classes of corporations: -RICs. Dividends: -SH must include those dividends in their gross income.” -so. single owner LLC). -C Corp. Corporation v. 1361. -AND Corp. -NOTE: a per se corporation may still elect to be treated as an S Corp. the income of C Corp. pays out dividends received to its SH’s. Partnership -Corporation -Sec. can’t be a p-ship or disregarded for tax purposes. -just a per se corp. -so. then it is an “eligible entity.e. -See Default Rules. is required to pay tax on income regardless of distribution to SH’s. 243 permits a “dividend received deduction” that is designed to eliminate (or at least mitigate the imposition of multiple layers of corporate tax. Sec. REITs. old thing to do was apply the 4 factor test.7701-2(a)) applies to business entities. banks -tax-exempt corp. 11 tax rates on dividends (no pref. REMICs -insurance co’s. Arguments to Disregard Entity: -Shame Argument: the corp. -if business entity is not a per se corp. SH deduct dividends received to prevent triple or more taxation -triple tax could happen if C Corp. -lets Corp. -What if C Corp. . 7701(a)(3) -includes associations. is not allowed to deduct the dividends for tax purposes. -Remember if entity is disregarded.. but this doesn’t help much. pays Sec. receives dividends? -The C Corp. it is disregarded for federal tax purposes only. -Per Se Corporation. should be disregarded entirely for tax purposes. 7704. -As a result. eligible entity can elect its classification. -now. treatment). -this does not affect state law of entity (i. is taxed twice. -publicly traded partnerships. we have 3-step process. -However. “Check-a-Box” Regulations -this regulation (Reg. includes: -entity incorporated under state law. if it meets requirements in Sec. 301.
as agent and SH’s is not req’d. need 3 factors. -look at Bollinger (S. -Agency Argument: is that corp. Property Transactions: Review of Income Tax Concepts -remember that this course focuses on transactions b/t Corp. Ct. -in National Carbride. case). is acting as the agent of the SH/principal. -b/c TP chose to form corporation. may act as agent of its SH’s. and its SH’s. -b/c corporation just has to be made for some valid business purpose or conduct some business activity (extremely low threshold). acknowledged corp. -note that the rigid req’t of arms-length b/t corp. . -IRS can argue that TP formed corporation for tax avoidance pruposes. Ct.8 -TP’s have hard time winning this argument. S.
9 -Steps: 1. Does TP realize a gain or loss? -Sec. 1001(a) Gain = AR – AB; and Loss = AB – AR 2. Need to determine what the AB is. -Sec. 1012 Cost Basis. -the “cost” basis of property received in an arm’s length taxable exchange is equal to the FMV of the property received in the exchange. -Philadelphia Park Amusement v. U.S. -Cost includes liabilities incurred to acquire property. -Sec. 1016 adjusts the basis of property. 3. Need to determine AR. -AR = amount of cash + FMV of other property received by TP. -also includes liabilities from which the TP is discharged as result of sale or disposition. 4. Now, is this realized gain or loss recognized? -General Rule is that it is recognized, but there are exceptions. -remember need specific code section allowing loss deduction to be recognized. Substituted Basis Rules -use substituted basis to preserve gain or loss. -2 Types: 1. Transferred Basis property is property having a basis determined in whole or in part by reference to the basis in the hands of the transforer. Sec. 7701(a)(43) -in other words, the transforer’s basis in property transfers over to the transferee. 2. Exchanged Basis is property having a basis determined in whole or in part by reference to other property held at any time by the person whom basis is being determined. -in other words, TP’s basis in property acquired in the exchange is determined by reference to the TP’s basis in the property relinquished in the exchange. -get basis from property TP transfers; i.e. property has basis of 10, new property has basis of 10. -Sec. 1031 like kind exchange. -Holding Period: The TP’s holding period = holding period in old land exchanged for new land.
Character of Gain or Loss -is it ordinary or capital?
10 -Sec. 1221(a) defines capital asset. -Remember Sec. 1231 property. (does not include inventory property). -Remember C Corp. does not get 1(h) preferential treatment for LTCG. Capital Loss -Remember C Corp. does not get extra 3k of excess capital losses. -C Corp. can carryback 3 years and forward 5 years.
Chapter 3: Formation of Corporation
-two ways corporation raises capital: 1. stock or 2. debt.
11 -stock represents an equity interest (has residual interest, no right to return); -common stock v. preferred stock (equity investment with some debt-like qualities, i.e. right to return, such as dividend, before common stock). -whereas, debt gives person right to receive return (usually fixed rate). In-Class Examples Chapter 3, Section 1, Part A 1/20 (1) Amy forms X Corporation. Amy transfers Blackacre to X in exchange for 10 shares of common stock (with a FMV of 100,000). Blackacre is a tract of undeveloped land that Amy has held as an investment for 2 years. At the time of the exchange, the FMV of Blackacre is 100,000 and its basis in Amy’s hands is 50,000. -Blackacre has AB of 50k and FMV of 100k. -assume that stock value is equal to FMV of what’s given. -Is there any realized gain? -Yes, use Sec. 1001(a); AR = 100k and AB = 50k, so there is a realized gain of 50k. 1-Is this realized gain recognized? -Sec. 1001(c) says to recognize gain unless non-recognition section applies. -in this case, Sec. 351(a) applies, meaning don’t recognize gain (so, there is 0 gain recognized). * 3 Requirements for Sec. 351(a) Non-Recognition: 1. Property transfer. 2. Solely for stock. (ignore “or securities” part). 3. Control. – that is the property transforers be in control of the corporation after the exchange. Control means that property transforers have at least 80% control of corporation. (368(c)) -Policy Reason for Non-Recognition: there has been no change substantively, just a change in form. Also, want to promote formation of corporation. -i.e. only changing form in ownership of Blackacre. 2-Now, we determine the basis of Amy’s stock: -Sec. 358(a)(1) is used when Sec. 351 applies to determine basis. -says to use “exchanged basis,” meaning take same basis of property exchanged as basis of stock. -So, Amy’s basis in stock is 50k. 3-Last, we determine what Amy’s tacked holding period is in the stock? -Sec. 1223(1) applies b/c Amy held Blackacre as investment (capital
1032: no gain or loss shall be recognized to a corporation on the receipt of money or other property in exchange for stock of such corp. Stock Class Basis = (FMV of class / Total FMV) * Exchanged Basis. except non-qualified preferred stock. -RA: (3) Common Stock = (80k/100k) * 50k = 40k Basis. X Corp’s basis is 50k. and Corporation has gain preserved in Blackacre. 351(a) applies to any kind of stock. 6-X Corp’s tack holding period in Blackacre: -Yes. 1. -So. -importance of tack holding period is that allows for LTCG treatment. what happened? -Amy has her gain preserved in stock. 1032. 1223(2) gives tack holding period for transferred basis. Amy and Ben form X Corporation. -But this gain is not recognized b/c of Sec.12 asset). 5-X Corp’s Basis in Blackacre: -Sec. 358(b) and Reg. so Amy gets to tack holding period for stock. So. -so. Preferred Stock = (20k/100k) * 50k = 10k Basis.000). -Sec. . -BUT not that significant b/c Corp. 362(a) says to use Transferred Basis. X Corp. b/c of Sec. cost of 351 deferral is that instead of one gain preservation.000) and 2 shares of preferred stock (with a FMV of 20. we now have 2 gain preservations. 1001 results in realized gain of 100k. 4-X Corporation’s Tax Consequences: -just applying Sec. -Amy still does not recognize gain (351(a)) and still has same basis of 50k (358) but now we have to determine how to allocate this 50k basis to each class of stock. Sec. b/c Amy gets to use holding period of Blackacre for stock. gets same holding period as Amy had in it.358-2(b)(2) -make allocation in proportion to FMV of each class of stock. Allocation of Basis b/t Classes of Stock (2) Same facts as in (1) except Amy receives 8 shares of common stock (with a FMV of 80. -Sec. meaning same basis as Amy had in Blackacre. does not get 1(h) preferential treatment. -So.
80% control is satisfied. Sec. -Keep in mind that Ben’s basis in stock = 100k b/c it is from Sec. -So. Ben is a property transforer. aggregate the two pieces of property.000) and inventory (FMV = 50. 351(a). meaning Basis in Stock = 50k.000). 85-164: -Fraction: (FMV of Tack Property / Total FMV) -Fraction: (FMV of Non-Tack / Total FMV) -RA: Tack: (50k FMV / 100k Total FMV) = ½ Non-Tack: (50k FMV / 100k Total FMV) = ½ . 351(a) looks at all the property transforers in the aggregate to see if all together have control (that is 80% of Corp. (a) Amy transfers Blackacre (same information as in (1)) in exchange for 10 shares of common stock (with a FMV of 100. Rul. Split Holding Period (c) Same facts as in (a) except Amy transfers Blackacre (FMV = 50. -as a result. has 50k basis in Blackacre. 1223(1).).13 Aggregate Transforers for Control Req.000). has tack holding period.000 and a basis of 50. 358(a)(1). Transferring Inventory. -What about holding period? -Rev.000. and has 50k basis in stock. 1231 property. 1032. Sec.000 in cash in exchange for 10 shares of common stock (with a FMV of 100. question is whether Ben is a property transforer? -IRS has ruled that cash is property for purposes of Sec. Ben transfers 100. 351(a). 351(a) is satisfied? -Sec. -this is to prevent Amy from transforming her ordinary income property to LTCG property immediately. -so. meaning Amy has no recognition of gain. Sec. Amy has a fresh start for holding period b/c holding period only works for Capital Asset property or Sec. -X Corp. basis = 10. So. instead Amy must wait 1 year. -X Corporation has no gain on either exchange. Transferring Capital Asset and Inventory. 1012 cost basis and that Ben gets a fresh holding period in stock. 362(a).000). -the issue here is whether the control requirement of Sec. -for basis.000. Sec. basis = 40. Fresh Start Holding Period (b) Same facts as in (a) except Amy transfers inventory with a FMV of 100. Amy realizes 10k gain on inventory and 40k on Blackacre. but no recognition of gain b/c of Sec. -issue is whether Amy gets tack holding period? -NO.000.
(4) Amy forms X Corporation. 150k) and SH would have to reduce basis (i. ½ has tack holding (LTCG treatment) and ½ has non-tack holding period (ordinary income). usually for depreciation purposes or b/c Corp. tack holding period. -this is done to give Corp. so can’t say half shares b/c applies to each share. 362(a) gives transferred basis. 351 is satisfied and when 362(a) transferred basis exceeds FMV of stock given. basis = 150. BUT . b/c of Sec. thus preserving the loss of 50k b/c if sold stock immediately recognize loss of 50k.e.000. disallows recognition of realized 50k loss. 351. Again the FMV = 100k. 358(a)(1). 362(e)(2) Limitations on Built-in Losses -applies when Sec. 1223(2) gives X Corp.000) and Greenacre (FMV = 200. 1032 disallows any recognition of gain or loss.e. . (b) Amy transfers Blackacre (FMV = 100. -From X Corp’s perspective: -Sec. basis = 75. will sell property soon.000. X Corp’s basis = 100k. gets transferred basis (i. 1223(1) b/c Amy exchanged capital asset and property rec’d has exchanged basis. -Does Amy take tack holding period? -Yes.000) in exchange for common stock with a FMV of 300. which has been satisfied. (a) Same facts as in (1) except Amy’s basis in Blackacre is 150. so Amy’s basis in common stock is 150k. -So.14 -so. higher basis. -get tack holding period b/c basis starts with transferred basis at 362(a).000. -Sec. make election. Common Stock rec’d = 100k. 362 determines X Corp’s basis in Blackacre. gets FMV basis. Sec. 100k instead of 150k). -NOTE: SH would prefer to recognize loss immediately. -BUT Sec. . 362(e)(2)(C) Election -if both SH and Corp. -Sec. says to use exchanged basis.000. Meaning. -What is Amy’s stock basis? -Use Sec. -Sec. we have AR of 100k less AB of 150k = realized loss of 50k. then Corp. -each share has a split holding period. . but 351 is mandatory so recognition of loss is disallowed. -Basis Reduction = Aggregate AB – Aggregate FMV -basically Corp. -Sec. in this problem the basis reduction is 50k. -So.
000).000) in exchange for common stock with a FMV of 375. 351 says don’t recognize. -so. and 175k in GA. -aggregate basis for stock basis. basis = 175. basis = 175. (take transferred basis of each asset).000) in exchange for common stock with a FMV of 300. -get tack holding period. -X Corp’s perspective: -Basis: -150k in BA. (c) Amy transfers Blackacre (FMV = 100. and Redacre (FMV = 75.000.15 -Amy is still realizing a loss of 50k on Blackacrea and realizing a gain of 25k on Greenacre.000. still exchanged). 362(e)(2) applies.000. basis = 150. Amy’s basis: -Sec. -And. -as a result. 362(e)(2)(C) Election could still be made. -X Corp’s Perspective: -1032 says no recognition.000. -Amy’s perspective: -Sec. 1223(1). BA’s basis is reduced by 25k. -AND. 358(a)(1) says take aggregate basis (so aggregate of both properties’ basis. 362(e) (2) does not apply.000) and Greenacre (FMV = 200. Greenacre (FMV = 200. GA’s basis = 175k -Remember Sec. -Now. Sec. basis = 225k.000. Amy gets tack holding period. -Aggregate Basis = 225k and Aggregate FMV = 300k. which would result in Amy having 300k basis in stock. -Aggregate AB = 325k and Aggregate FMV = 300k. -Amy’s basis = 325k.000. -So. Meaning. basis = 150. so basis = 125k. and 362(e)(2)(B) says how to allocate basis reduction (allocate based on built-in losses).000). (Remember to go asset-by-asset). -Amy’s perspective: . basis = 150. (d) Amy transfers Blackacre (FMV = 100. -find basis for each asset. 1223(2). basis = 150k for BA. and 75k for GA.000.
Multiply that ratio by basis reduction amount to determine how much to reduce each basis of each asset. Chapter 3. -BA = 150k less 40k reduction = 110k -GA = 175k (no change b/c no built-in loss) 2. Amy’s basis in stock = 375k. only use assets with built-in losses.000 in cash and undeveloped land having a basis of $20. 358(a)(1) -X Corp’s perspective: -Basis Steps 1-Start with transferred basis: 362(a): -RA = 150k less 60k reduction = 90k.16 -Basis = 475k.Next Does 362(e)(2) apply? -YES. Ben contributes $100. Sec. and allocate the basis reduction to each in accordance with ratio Formula = ( Realized loss of Asset / Aggregate Realized Loss of all assets) * Basis Reduction 5. Now. aggregate the AB and FMV of assets.000 and power shovel with basis of $125. 1. for RA (75k/125k) = 60% * 100k = 60k. 4. Part A Problems: Problem 1.000 and FMV of $100. Determine transferred basis.000 and FMV of $150. 3. Next. using Sec.000 in exchange for 20 shares of voting stock. -If make 362(e)(2)(C) election. then 362(e)(2) applies. for BA (50k/125k) = 40% * 100k built-in loss = 40k. Amy contributes truck with basis of $50.000 . -so. IF aggregate FMV exceeds aggregate AB. 362(a) 2. 362(e)(2) Steps: 1. 3-BUT how do we allocate the 100k built-in losses b/t BA and RA? (no change to GA b/c no built-in loss) -Use Formula: (FMV of Property / Aggregate FMV) -so. b/c Aggregate AB of 475k is greater than Aggregate FMV of 375k. Sec.
-Basis: -Truck = 50k. Problem 2. -Sec. FMV of the preferred stock is $100. . 85-164. -Rev. 351 apply? -YES. -Ben’s Tax Consequences: -Land: realized gain of 130k (AR: 150k less AB: 20k) -the cash purchase is not a realization event. -Tack Holding Period: look to Rev. 362(a)(1) -Shovel = 125k. have to allocate basis pursuant to 358(b) b/t classes: -Preferred = (100k/250k) * 120k = 48k. -X Corp’s Tax Consequences: -no recognition of gain/loss b/c of 1032. -Common = (150k/250k) * 120k = 72k. -362(e)(2) goes transforer by transforer (so don’t look at Ben’s assets here. b/c both Amy and Ben are transferring property. -Cash represents 40% and Land represents 60% of total FMV of assets transferred. 358(a)(1) (cash gets added in for basis) -NOW. Sec. just look at Amy’s. Meaning 40% has fresh start and 60% has tack HP. how much gain they have to recognize. -no recognition of 50k realized loss b/c of Sec. 351(a) applies.000. -Stock Basis for Amy: 175k b/c it is equal to aggregate of properties’ basis she transferred (exchanged basis). -Stock Basis for Ben: 120k. Thus. -Land = 20k. 358(a)(1). so no recognition of gain. Note the basis of the stock to each SH. 1223(1). Rul. must split Holding Period to each share. (a) 1. 85-164 also disallows SH from allocating tack holding period to certain class of stock. Rul. b/c rec’d 2 classes of stock. -do we have to consider 362(e)(2)? No b/c aggregate FMV does not exceed aggregate AB.000 in exchange for 100 shares of non-voting stock that includes an 8% dividend preference and also for 12 shares of voting common stock. both are receiving stock. Sec. -Tack Holding Period: Yes. So no recognition. Claire’s Tax Consequences: -realized loss: 50k. corporation’s basis in the assets. -Amy’s Tax Consequences: -Truck: realized gain of 100k (AR: 150k less AB: 50k) -Shovel: realized loss of 25k (AR: 100k less AB: 125k). and both are in control (100%). Sec. 362(a)(1). which says that each share has a split holding period based on relative FMV of the transferred asset. 351(a) (meet 3 req’s exchanging property solely in exchange for stock. -Does Sec.17 and FMV of $150. 362(a)(1). and control is met).
-SW Truck: 150k. 2. -Land: 30k. -realized gain of 40k on WT Truck and 50k loss on SW truck. . 362(a)(1). Sec. (c) 1. Basis = 100k. Sec. -Stock Basis = 210k. -Basis: -SW Truck: 150k. Preserves gain. -Remember go Transforer by Transforer. SW Truck’s basis = 140k. 351(a). 1223(1). Sec. -And what happens is that Y Corp. b/c aggregate Basis of 150k is greater than aggregate FMV of 100k. 362(e) Election would result in Claire’s basis being 200k. -So. Sec. Y Corp’s Tax Consequences: -no gain or loss recognized b/c of Sec. look at Corp’s aggregate AB of assets compared to aggregate FMV of assets. 1223(1). -Land: 30k. Don’s Tax Consequences (see above). (aggregate the basis of trucks) -Tack HP: Yes. 2. Sec. 362(e)(2)(C) Election: -need consent by both Claire and Y Corp. -Basis: -go asset by asset. (reduced to 140k b/c of 362(e)). 362(e)(2). takes 150k basis in Truck and Claire takes a 100k basis in stock. Sec. -Next. -excess (10k) is basis reduction and apply that basis reduction to the SW Truck (b/c has built-in loss). (b) 1. -recognized gain: 0 b/c of Sec. 358(a)(1). 362(e)(2) b/c of built-in loss. Claire’s Tax Consequences: -no recognition of gain or loss b/c of Sec. Y Corp’s Tax Consequences: -no gain or loss recognized b/c of Sec. Claire’s Tax Consequences: -no recognition of gain/loss b/c of Sec. 358(a)(1). 1032. and Y Corp. 351(a).18 -Stock Basis: 150k. Sec. 3. 351(a). -HP Tacks b/c land is capital asset or 1231. -LW Truck: 60k. b/c truck was 1231 or capital asset. Don’s Tax Consequences: -realized gain: 70k. -What about Sec. 362(e)(2). -Tack HP: yes. 3. and transforer by transforer. -so. 362(a)(1) – Transferred Basis. 362(a)(1). 358(a)(1). but then limit by Sec. Sec. 362(a)(1) -Sec. -Tack HP: yes. -AB: 210k > FMV: 200k. 1223(1). taking SW Truck with 150k basis. Preserves loss. Sec. Sec. b/c of 1223(2). basis reduction of 50k. 362(a)(1). -Meaning. go to Sec. Sec. -Stock Basis: 30k. 1032. Sec.
and in return receives stock worth 50k. 362(e)(2). -Bulldozer: 75k. -SW Truck: 150k. Sec.19 -Stock Basis: 265k. 15k basis reduction. 1223(1). reduced to 70k. takes basis of 150k in SW Truck and 75k in Bulldozer. AB: 265k > FMV: 250k. -Go to Sec. (50k/75k) * 15k = 10k for SW Truck. (25k/75k) * 15k = 5k reduction for Bulldozer. -accrued cash receivable but don’t include that amount in gross income until that . Y Corp’s Tax Consequences: -no recognition b/c of 1032. 362(e)(2). 362(e)(2). 362(a)(1). allocate it based on built-in loss assets in proportion to their respective built-in losses. 358(a)(1). reduced to 140k. -Basis: -Land: 30k Sec. -Formula = ( Realized loss of Asset / Aggregate Realized Loss of all assets) * Basis Reduction -Thus. 3. -Tack HP: yes. -LW Truck: 40k. Sec. -AND. -If make 362(e)(2)(C) Election: -Claire’s stock basis is reduced to 250k and Y Corp. Sec. 2. 362(e)(2) (B). Don’s Tax Consequences (see above). Accounts Receivable Example -EX 1: Beth transfers Accounts Receivable worth 50k to Corp. (cash method) -Basis in A/R = 0 b/c not received cash yet. thus.
-So. -What happens when later in year. pays out 42. 80-198 prevents Beth from recognizing this income b/c Assignment of Income Doctrine does not apply. -at transfer. = Basically. but Corp. collects the 50k A/R. -NOW.500 as dividend to Beth. -42. Rul. pays taxes on the 50k at 15% = 7500 tax. then Beth would pay taxes b/c Beth earned the income.500 after tax cash. . use assignment of income to have TP recognize income when collected). As a result. (if for tax avoidance. and having Corp. -Thus. -Then. Beth includes the 50k in her gross income and pays taxes on 50k at 35% rate. this could apply when there is an Installment Note. and pay 17500 in taxes. Rul. collect A/R. b/c income is included when it is earned (not when it is received). 80-198 Accounts Receivable is treated as property for Sec. -Also.20 amount is received. -EX 2: What if Beth is only putting 50k A/R in Corp. -another example is transferring net operating losses to Corp. and collection of A/R does not matter. -IRS disallows this in Rev. Sec. Beth is better off transferring A/R to Corp. ?? Things to Remember for Sec. -look at control element post-transfer/exchange. 80-198. Then TP transfers installment note to Corp. 453. -2nd assume transfer of A/R to Corp. -Rev. the TP is not req’d to recognize gain unless TP is making the transfer for tax avoidance purposes. What if Beth is Accrual Method? -then assignment of income does not apply. so Assignment of Income Doctrine does apply. the Corp. Beth is already taxed.125 After Tax Cash. Rul.500 dividend is taxed at 15% = 6. works for tax avoidance. can’t transfer A/R to Corp. Corp. -EX: Buyer agrees to pay TP over 10 years for property. thus leaving Beth with 36. for tax avoidance purposes. -so. 351(a).. not just formation of corp. A/R is collected? -it depends if the Assignment of Income is applied b/c Assignment of Income Doctrine says that who earned the income pays the taxes on it. meaning when Corp. . -BUT Rev. this is good example of when transfer of A/R to Corp. this is disallowed to offset gains of Corp. 351: -it applies to on-going corporations.375 tax. -1st assume no transfer: then Beth would be taxed at 35% on the 50k. In-Class Examples . if applied to this case. BUT . with 32. thus no recognition of gain. is not going to be conducting ongoing business (guess it’s just for investment purposes).
3 req’s are satisfied. AB = 80. 1032 does not apply b/c no exchange for stock. Section 1. Eric transfers 100. which was formed several years ago. Dana transfers various business assets (FMV = 400. this is not a recognition event. to SH. 351? -Yes. -since Chris is sole SH. does not recognize gain at receipt of capital contribution. AB per share = 5. then 2nd we would deem Dana transferring 60 shares to Eric (could classify as gift or compensation). X does not issue any additional shares to Chris in exchange for the securities. 1. form DE Corporation. -for Corp. X is in need of additional liquidity.000. and basis per share = 5. b/c it is a constructive Sec. the issuance of stock is meaningless (makes not economic difference).000) to X. -Does Sec. -So. No proportionate requirement. so Corp.000 in 80 shares deemed to receive from Corp. -Reg. -AND.000 in cash and receives 80 shares of DE stock.000 per share. 1st assume proportionate transactions from Corp. post-transfer. -in facts. has a 25k basis in the securities.000. -Keep these transaction separate.000 in 20 shares deemed to receive from Corp. -Then do the ‘constructive’ transaction from SH1 to SH2. Part C 1/25-1/27 (1) Chris is the sole shareholder of X Corporation.250. 351(a) exchange. Chris has 100 shares. Sec. 351 apply? Yes. -Dana’s Tax Consequences: -Basis in Stock = 80. AB = 25. -the question is does disproportionate exchange still satisfy Sec. -BUT there is Sec.21 Chapter 3. Sec. Eric is Dana’s son. which says that Corp. -as for basis. Chris should get to increase his basis by the AB of securities (thus increase basis in stock by 25k). Eric. and then 2nd transferred to the ultimate recipients by way of gift or compensation if the facts so warrant. -So. Receipt of stock disproportionate to property transferred (2) Dana and her son.351-1(b)(1) states that “in appropriate cases” the stock will be treated as if first received in proportion to assets transferred. for problem. so Chris transfers a portfolio of marketable securities (FMV = 100. The DE stock has a FMV of 5. Chris currently owns 100 shares of X stock (FMV per share = 10. so we could assume that the 60 shares . -Eric’s Tax Consequences: -Basis in Stock = 100. 118(a).000. -so.000) and receives 20 shares of DE stock. 362 applies for basis when there is a capital contribution. and Eric rec’ing 20 shares. we would 1st deem Dana rec’ing 80 shares.000).
351(b). you apply the tax rules when appreciated asset is used to pay for services. -basis starts with SH’s basis in property .000 in cash in exchange for 30 shares of W stock (FMV = 300.000. -3rd scenario is that the 60 shares deemed transfer is repayment of a loan. go to Sec. -As a result. then use same principles as gift transaction (Sec. -Eric has income. Sec.000) and 50. Fred transfers 300. -So.000) in exchange for 70 shares of W stock (FMV = 700. George purchased the land 2 years ago as an investment. then gets 162 deduction. b/c basis of stock is same in part as land transferred. AB = 500. -What about basis? -SH’s AB in property – (Boot) + SH’s recognized gain = SH’s Basis in stock. (a) George transfers land (FMV = 750. 1223(1). 358(a)(1) -RA: 500k – (50k) + 50k = 500k basis. Sec. -Meaning. Sec.22 deemed to transfer from Dana to Eric is a gift.000). 102. 1015). Eric takes the 60 shares with an AB of 60k (the transferred basis). Stock + Boot (3) Fred and George form W Corporation. = Remember Basis is to preserve non-recognized gain. -Now. -Does Holding Period tack? -Yes. not gift? -Then the 60 shares Eric receives is compensation. George recognizes 50k of gain.000 in cash. 351(b) allows this when SH receives “other property or cash” in addition to stock. 351(a) apply for non-recognition? -not satisfied b/c “not soley for stock” but Sec. -Does Sec. which requires recognition of cash or other property (called “boot”). -2nd scenario: What if the 60 shares transferred are instead compensation. and no recognition of gain b/c of 351(a). and gets Cost Basis. -As for George: -Realized Gain is 250k = AR: (700k stock + 50k cash) – AB: 500k. the 60 shares deemed as gift from Dana to Eric results in FMV of 300k and 60k of AB. -So. -if considered to be a gift. -Fred takes a 300k basis in 30 shares. -Dana has recognition of gain event.
000 in cash. SH’s Basis: Sec.000) and 50. 358(a)(1).000? -Then 25k of the 250k realized gain is characterized as Ordinary Income. -RA: 500k + 50k = 550k basis. -meaning immediate LTCG characterization. except Character. Meaning. -Realized Loss of 50k = AR (700k stock + 50k cash) – AB: 800k. George has taken depreciation deductions of 250.000.000. what about Holding Period? -yes. the 50k is characterized as Ordinary Income b/c all gain of 250k is depreciation recapture. -What if instead depreciation deductions = 25. -NOW. -What is character of gain? -character is determined by the character of property transferred. 358(a)(1) Basis Formula = SH’s AB in property transferred to Corp. still can’t Recognize Loss (c) Same facts as in (b) except George’s AB in the equipment is 800. SH is still not allowed to recognize any loss. 362(a) Basis = SH’s Basis in property transferred + SH’s recognized gain.000 with respect to the equipment (so all of the gain inherent in the equipment is subject to §1245 recapture). -Character of property transferred is 1245 property (which is depreciable personal property). Sec. 1223(1). Corporation’s Basis Sec. -Sec. George used the equipment for 2 years in another business that he operated as a sole proprietorship. – (Boot) + SH’s recognized gain.23 transferred. -Sec. . -As a result. Even with Boot.000) in exchange for 70 shares of W stock (FMV = 700. 362(a) Basis = SH’s Basis in property transferred + SH’s recognized gain. it tacks b/c this is 1231 property. -All is same as above. 1032. AB = 500. Sec. See Sec. Depreciation Recapture (b) George transfers equipment (FMV = 750. -What about George’s stock basis? -RA: 800k (AB of property) – 50k (boot) + 0 (recognized gain) = 750k. 351(b) says even if SH receives boot in exchange. -As for W Corporation: -no recognition of gain or loss. George’s gain is LTCG.
000). George receives 70 shares of W stock (FMV = 700. 68-55 says to determine Gain and Character on asset-byasset basis. 1239. George used the equipment for 2 years in another business that he operated as a sole proprietorship. Property must be depreciable in hands of Transferee. 1239*** *% = (FMV of Asset / Total FMV of all sets) ** Look at gain recognized and compare it to boot. 2. Sell or Exchange of property b/t related persons. land. can’t recognize more than boot or more than realized! Rule: recognize gain to extent of boot. Rul. Sec. AB = 145. basis in equipment = 750k. 362(a)(1). and has taken depreciation deductions of 10. OI. Sec. 362(e)(2).000).000 in cash. so go to Sec. -As for basis: 800k (b/c no gain recognized increase). -Remember could have 362(e) Election!! Multiple Assets and Boot (Rev. -BUT we have built-in loss. But we do have to consider Sec. satisfied.24 -W Corporation: -no gain/loss. W will use the equipment. George purchased the land and building 2 years ago as an investment. 68-55) (d) George transfers the following assets: (1) equipment (FMV = 300. have related persons b/c SH (George) owns more than 50% of stock in Corp. Sec. Meaning. AB = 250. ***don’t worry about Sec. In exchange. Equipment Land Building FMV 300k 300k 150k % of Total 40% 40% 20% FMV* Stock (700k) 280k 280k 140k Boot (50k 20k 20k 10k cash) Total AR 300k 300k 150k AB (350k) (250k) (145k) G/L Realized (50k) 50k 5k G/L 0. -Rev. and building in its business.000) and 50. George recognizes 5k gain. which requires: 1. AB = 350. which requires us to reduce basis by 50k built-in loss. and (3) a building (FMV = 150. 1239 requires us to characterize gain as Ordinary Income.000.000 with respect to the building. Rul. 20k** 5k** Recognition 351(b) 351(b) 351(b) Character N/A LTCG. AND -yes.000. -Sec.000. (2) land (FMV = 300. 1250 Recapture for this class. -yes. 1032.000). but that allows George to . -NOTE: on net basis.
meaning Equipment’s basis is now 330k. which has been operating a real estate development business for several years. 362(e)(2) limit? -Remember we’re talking about Corp’s AB is in the assets. which Y had used in its business for the past 2 years.000. 362(e)(2) does apply. -Corporation’s Asset Basis: -Use Asset-by-Asset Method from Rev. Rul. -Hank’s Tax Consequences: . there is a 20k built-in loss. -What about Sec. -As a result. -So. -Meaning. -Land = 270k = (250k + 20k). Hank transferred a tract of undeveloped land (FMV = 225. -Basis = AB in Asset + SH’s recognized gain in that asset. Rul. (a) In exchange for the land. AB= 15. -If had 362(e) Election: George’s Stock Basis = 700k.000. thus basis = 330k. the 20k basis reduction is allocated to the Equipment. Hank received 20 shares of Y common stock (FMV = 200.000) to Y. Sec. as Boot (4) Hank is the sole shareholder of Y Corporation. -George’s Basis in Stock: AB (350k + 250k + 145k) – (50k Boot) + 25k recognized gain = 720k. THAT’s why we have the Rev. AB = 150.000). ***** Other Property Received from Corp. 358(a)(1). 362(a) decrease by 20k basis reduction from 362(e)(2). which is a 20k basis reduction. Also. This year. -Aggregate FMV = 750k < Aggregate AB = 770k. Hank purchased the land as an investment several years ago.000) and a truck (FMV = 25. -Equipment = 350k. See Sec. Asset-by-Asset approach allows loss property to take advantage of boot. -Building = 150k = (145k + 5k).25 use non-recognized loss to offset gains. to prevent recognition of loss. 68-55.
-Character: determined by reference to the truck. determined by reference to the property Hank transfers for the Stock. the 5k loss is permanently eliminated. 351(f) points us to Sec. 311 govern. 358(a)(2) gives rule for basis of Property. Sec. 1032 no gain recognized for stock. -Does NOT tack in Truck b/c Truck’s basis = FMV. 351(b) says to recognize gain to the extent of the FMV of the other property received. it is not good to transfer loss property in a 351 . 358(a)(1). which does not permit the Corporation to recognize any loss in the exchange. transfers non-cash boot property in Sec. 1223(2). Sec. -Sec. Excess of 1245 recapture is 1231 gain. -Stock Basis = 150k = AB in Land (150k) – FMV of Truck (25k) + Recognized Gain (25k). sold property to SH at FMV. gain is all preserved in the stock basis. 351 exchange. which is the land. 362(a). See Sec. thus 1245 as to depreciation deductions and ordinary income. 1223(1). As a result. 351(f) says when Corp. -No impact to Hank’s Tax Consequences.26 -Realized Gain = AR(200k Stock + 25k Truck) – AB(150k) = 75k realized gain. -Corporation’s Tax Consequences: -Sec. -Recognized Gain = 25k. the rules of Sec. AR: 25k – AB: 15k = 10k. thus use: -Sec. -Answer: NO recognized loss. -So. Sec. Meaning. 311. -Character of Gain: LTCG. (b) Same facts as in (a) except Y’s AB in the truck was 30. says the Basis is simply the FMV of the property. which is depreciable personal property.000 at the time of the exchange. 311(a) operates as a loss elimination rule. the Corp. 311(b) says if transferred property is appreciated property. -Basis in Assets: -Land = 175k = 150k AB + 25k Recognized Gain. -Meaning. -So. -Tack HP: yes. 311(a). -Holding Period: -Tacks in the Stock. is to recognize gain as though Corp. -Sec. -Basis in Truck = 25k. Sec. -Impact on Corporation’s Tax Consequences: -Sec.
-So.27 exchange. FMV. -Basis = 175k (same as above).000) and 5 shares of Y nonparticipating preferred stock (FMV = 25. -Sec.000) and a promissory note for 25. 351(g) gives rules for Non-Qualified Preferred Stock (NQPS) and says that NQPS will be treated as “other property” (boot that is) for purposes of 351(b). -Corporation’s Tax Consequences: -Does Sec. b/c 311(b) excludes debt instruments as being reported as gain. -Preferred Stock is Non-Qualified when redeemable within 20 years (could be req’d to redeem or just have right to redeem). NOTE: Non-qualified Preferred Stock is not qualified for Sec. Sec. -Recognized Gain = 25k. no recognized gain. -Hank’s Tax Consequences: -Realized Gain = 75k = AR (200k + 25k promissory note) – AB. The preferred stock has a par value of 5. 311(b) require recognized gain? -NO. Non-Qualified Preferred Stock (d) In exchange for the land. -NQPS Basis = 25k. Sec. (c) In exchange for the land. 358(a)(1) (see above). AR(200k + 25k NQPS) – AB. -Common Stock Basis = 150k. -Main thing is that debt can be boot. Hank received 20 shares of Y common stock (FMV = 200. -Recognized Gain = 25k. Hank received 20 shares of Y common stock (FMV = 200. Hank has the option of having the preferred stock redeemed by Y at the end of 5 years.000).000 issued by Y and due in 5 years (with adequate interest payable annually). 351(a) non-recognition. -Ask: is stock required to be redeemed within 20 years? if yes then fixed maturity date.000 per share and a 5% dividend preference. -NOTE: Hank may not use installment method to report recognized gain b/c he received NQPS. and that recognized gain can be reported in the installment method. 358(a)(2). -Hank’s Tax Consequences: -Realized Gain = 75k. -the promissory note (debt) is still boot. -Corporation’s Tax Consequences: . -Don’t worry about basis rules when debt is boot.
instead using cost basis. -Sec. -Tack HP: NONE. Philadelphia Park case. -Tack HP: NONE.000 at the time of the exchange. 1012 Cost Basis. including NQPS. but remember this loss may be recognized but not deductible. Reg. Sec. Then Look at Sec. Sec. -Land Basis: 225k. . -Hank’s Tax Consequences: -Gain Realized: 75k (AR: 225k – AB: 150k) -Gain Recognized: 75k. 362 does not determine basis. Hank received 45 shares of Y nonparticipating preferred stock (FMV = 225. 267 b/c 267(a)(1) – the Brier Patch – disallows this loss b/c is exchange b/t related persons. -Stock Basis: 225k. we have new HP. Sec. 1001(c) to recognize this realized gain. Go to Sec. -Philadelphia Park does not apply b/c not taxable event. fresh start b/c no substituted basis. 351. 1032 applies to both Common Stock and NQPS. -267 applies when exchange is b/t Corporation and SH with 50% + stock. 1032 applies to any stock.000). 1. (AR: 225k – AB: 250k) -Loss Recognized: 25k. 1012 Cost Basis. -Corporation’s Tax Consequences: -No gain recognized b/c 1032 (no req’t that 351 apply for 1032) -plus.1032-1(d) says use 1012 cost basis in this circumstance. The characteristics of the preferred stock are the same as in (d). 1001(c). Sec. use FMV of stock rec’d for basis. instead using cost basis. we have new HP. no recognition of gain/loss. 165. Just use general tax principles. First. 351 does not apply. -Hank’s Tax Consequences: -Loss Realized: 25k.28 -Sec. fresh start b/c no exchanged/substituted basis. (e) In exchange for the land. go to Sec. Solely NQPS is NOT governed by Sec. NQPS for Loss Property (f) Same facts as in (e) except Hank’s AB in the land was 250. So.
Sec. -Character of Gain: Ordinary Income b/c inventory property. 351(b) applies b/c rec’ing boot. no tack. 1012 Cost Basis. -Recognized Gain: 150k. Section 1. Note: 200k. 358(a)(1). -Not tested. Note – AB: 300k) -Does Sec. Part C “Solely for Stock” Problems (p. 351(b). 385(a)(2) FMV of boot. Sec. 351(a) apply? NO. . Sec. Sec. -Basis in Prom. -Stock Basis: 250k = AB: 300k – 200k Boot + 150k gain recognized. -preserves disallowed loss. -Corporation’s Tax Consequences: -no changes. -HP: new HP. but to know: 267(d) would lower amount of gain recognized when land sold at gain. Chapter 3.29 -Stock Basis: 225k. 7-8) Problem 1 (a) -Claire’s Tax Consequences: -Realized Gain: 150k (AR: 250k stock + 200k Prom. See Sec.
what if Don bifurcated the transactions by first selling Bulldozer for cash and 2nd exchanging Cement Truck for Stock. -Corporation’s Tax Consequences: -no gain/loss recognized b/c 1032. -NOW. Sec. -Basis: -Bulldozer: 300k.30 -Tack HP: none. -Basis in Prom Note: 200k. **NO 453 Installment Method b/c 453(i) says cannot use 453 Method for 1245 recapture. . 358(a). -use this table: Bulldozer Cement Truck FMV of property X’d 180k 270k % of FMV 40% 60% FMV of Stock rec’d 100k 150k Prom. Sec. -Stock Basis: 370k = AB: (300k + 150k) – 200k Boot + 120k gain. Sec. (b) -Don’s Tax Consequences: -Use Rev. (this is to recognize loss). 362(e)(2) limit applies. -Nye case disallows this transaction from being done. so basis = 180k. -we do this on an Asset-by-Asset approach. 1223(1). -can’t bifurcate a 351 exchange to recognize loss. 68-55 for realized/recognized gain/loss when SH transfers multiple assets in 351 exchange and receives boot in that exchange. Note rec’d 80k 120k AR: 180k 270k AB: (300k) (150k) Gain (loss) realized (120k) loss 120k gain Gain (loss) recognized None b/c 351(b)(2) 120k. 453(b)(2)(B). Only get tack HP if property transferred is 1231 or capital asset property. 351(b). -BUT Sec. disallows recognition of realized loss. Sec. b/c 1245 gain. -Stock Basis: 450k = AB: 300k + 150k recognized gain. Sec. b/c not 1231 or capital asset. -Corporation’s Tax Consequences: -NO gain recognized. 1245 OI. -Recognized Gain: 120k. -Tack HP: none. **No 453 Installment Method b/c note was for inventory. Sec. 362(a)(1) gives transferred basis in each asset. Rul. Character n/a OI. 1032. Sec. 362(a). 358(a)(2) -Tack HP: yes for 1231 property. 351(b). -Steps Transaction Doctrine: if two separate steps are really one transaction but done separately. IRS will treat as one for tax purposes to disallow tax avoidance. See Sec.
-Tack HP: yes. Note rec’d 160k AR: 360k AB: (210k) Gain (loss) realized 150k Gain (loss) recognized 150k gain. Sec. 351(b) Character 1231 gain or capital gain. 351(b) Capital gain. -NO 362(e)(2) limit. 1. -AB: 570k > FMV: 450k. 1. 362(a). Sec. Rul.31 -Cement Truck: 270k = (150k + 120k). Reg. all 120k is allocated to Bulldozer and Bulldozer has a basis of 180k. Reg. Sec. -Land: 90k = 60k + 30k. -See Prop. -How do we allocate this 120k b/t assets? -we allocate it to the built-in loss assets. 362(e)(2) apply? -Corp’s Aggregate AB in Property (that is determined under 362(a) and compare that to the Aggregate FMV of the Properties. Sec. Land 90k 20% 50k 40k 90k (60k) 30k 30k gain. Reg. -BUT Prop. and the Corp’s basis in Bulldozer would be 300k. 1. thus would be 250k basis. 362(a). -What if Sec. -Prop. 1032. **Remember when comparing AB to FMV. use the AB determined under 362(a) for the Corporation. -So. 362(e)(2)(C) Election were made? -the SH would reduce basis by 120k.453-1(f)(ii) says still use same 358 basis rules for stock basis of SH. (c) -Erin’s Tax Consequences: -Use Rev. 68-55.453-1(f)(1)(iii) and Prop. Reg. Sec. -Stock Basis: 250k = AB: (210k + 60k) – 200k Boot + 180k gain. Building FMV of property X’d 360k % of FMV 80% FMV of Stock rec’d 200k Prom. . -Basis: -Building: 360k = 210k + 150k.453-1(f)(3)(ii) -Corporation’s Tax Consequences: -no gain. 1223(1). -So. 362(a). 358(a).453-1(f)(3)(ii) says to increase basis of assets in property as SH recognizes gain under 453 Installment Method. 1. -Does Sec. the 120k is the required basis reduction under 362(e)(2).
-Why does this make sense? -b/c Andy’s realized but unrecognized gain needs to be preserved. 358(d)(1) says that debt relief is treated as Boot (money received) for Stock Basis purposes.32 Section 2.000. (Facts and Circumstances Test). -Exceptions: -357(b). The land is subject to a 10. -Look at Sec. if principal purpose of TP with respect to assumption was (1) to avoid taxes OR (2) was not for a bona fide business purpose. -Stock Basis: 50k = AB in Land: 60k – Boot (10k)** + 0 rec. Part A (1) Andy plans to form X Corporation to operate a real estate development business. . gain. -preserves unrecognized 40k gain. which represents the remaining principal balance on a recourse loan that Andy incurred to purchase the land several years ago. Andy will transfer a tract of undeveloped land (FMV = 100. Andy will receive 10 shares of X stock (FMV = 90. -New Brick: Debt Relief is included in AR. -Recognized Gain: 0. Section 2. 1032. -Andy’s Tax Consequences: -Realized Gain: 40k = AR: (FMV of Stock 90k + Debt Relief of 10k) – AB (60k). TP would recognize gain of 40k.000 mortgage debt encumbering the land. “Solely” For Stock: Assumption of Liabilities In-Class Examples Chapter 3. which says if TP receives property which would be permitted to be received under Sec. if Corp. and shall not prevent exchange from being within provisions of 351. then such assumption shall not be treated as Boot. 351 without recognition of gain if it were the sole consideration AND as part of the consideration another party to the exchange assumes a liability of the TP. -Corporation’s Tax Consequences: -No gain. In exchange. and X will assume the 10. gain. -no special rule for Corp’s assumption of liability.000 mortgage. exchanged 50k stock + 40k cash + assumed 10k debt. b/c assumption of liability is NOT boot (generally).000). 357(a).000) to X. *Now. then such assumption in the total amount shall be considered as money received by TP in exchange. -Basis in Land: 60k = AB: 60k + 0 rec. AB = 60. **Sec.
-so fact that 10k 1st mortgage is bona fide is irrelevant. and X will assume both mortgage debts. 357(b) says Total (all) liabilities assumed = Boot. . -Andy’s Tax Consequences: -Sec. -as a result. which is being transferred to Corp. (a) Andy plans to use the 5. -Remember Sec. but is a tax avoidance purpose.000). still recognized as gain b/c of “bad” purpose of 2nd Mortgage.000 from a local bank before he transfers the land to X. 1032. -Corp’s Tax Consequences: -No gain. 357(b) is not triggered b/c this 5k 2nd mortgage is not for tax avoidance. (b) Andy plans to use the 5. the total 15k debt is “money received. b/c the 5k debt is treated as Boot. The bank loan will be a recourse loan and will be secured by a second mortgage on the land. -Basis in Land: 75k = AB in land: 60k + 15k rec. Andy will receive X stock (FMV = 85. 357(b) Triggered: (2) In addition to the facts in (1). thus this triggers Sec. gain.33 Sec. and is for a bona find business purpose since the 5k is used to improve the land. -Andy’s Tax Consequences: -Gain Realized: 40k (FMV of Stock 85k + 10k debt relief + 5k debt relief).000 in loan proceeds for a family vacation. -Character of Gain: LTCG b/c of land being transferred?? -Stock Basis: 60k = AB in Land: 60k – 15k boot (liability assumption) + 15k rec. In exchange for the land.000 in loan proceeds to improve the land before he transfers it to X. -Since the 5k debt is to be used for family vacation. gain (tax cost investment). 351(b). Andy plans to borrow 5. not bona fide business purpose.” thus treated as Boot under Sec. 357(b). -Gain Recognized: 15k.
e. -So. 357(a) applies. -Recourse Debt: Creditor may go after secured property and after Debtor personally. . the mortgage debts. but will not expressly assume. which were transferred to Corporation. what happens: -Andy Tax Consequences: -Realized Gain: 40k = (85k stock + 10k 1st mortgage + 5k 2nd) -Recognized Gain: 0. -Basis in Books: 300k. Study Problems (p. . NOTE: if Corp. -RA: the liability has a bona fide business purpose b/c the liability was used to acquire the books. Sec. -3rd determine if Sec. Debtor is personally liable for debt. 358. -So. meaning Sec. -2nd determine if Sec. . the Corporation is not assuming debt. -Corporation’s Tax Consequences: -NO gain. Reg. 1032. 357(d)(1)(A). 362(a). to buy the books). 357(d)(1)(B) says to treat non-recourse debt the same as recourse debt (that is treat debt as assumed) for Sec. (b).358-3.34 Non-Recourse Debt: (3) Same facts as in (2)(a) except both mortgage debts are nonrecourse. 1. -Frank’s Tax Consequences: -Realized Gain: 150k = AR: (250k FMV stock + 200k debt relief) – AB: (300k) -Recognized Gain: -1st determine if Sec. -RA: yes 351 applies. 357(d)(1)(A) applies to determine if Sec. 351 applies. 357(b) applies (any exceptions to 357(a)). -Non-Recourse Debt: Creditor may only go against property securing debt. liability assumed by Corp): 200k. -See Sec. 357(a). b/c . and Sec. takes Recourse Debt subject to (instead of assuming it). when there is Non-Recourse Debt. The Debtor is not personally liable for debt. -assume that “assumption of Recourse Debt” satisfies Sec. 358 applies. 9-10) Problem 1 (a) -PMSI = debt was incurred to buy property (i. -Stock Basis: 100k = AB: 300k – boot (money rec’d. X will take the land subject to. 358(d). 357(a) and Sec. -RA: yes. but is taking the land subject to the Non-Recourse Debt. Sec. 357 and 358 are used.
Sec. So. This was okay under 351(b). probably won’t find Tax Avoidance purpose b/c this debt is old and cold. . what about bona fide business purpose? -NO. Wheeler (5th circuit): where taxpayer transferred a partnership interest to a corporation in a 351 exchange and the taxpayer recently incurred debts on such partnership then the liabilities assumed constituted boot. 357(b) b/c old and cold even though debt was to pay off gambling debt. Problem 1 (b)(1)(ii) -this would satisfy Sec. -NOW. Was not a bona fide business purpose. Dyla: we had some debts that were incurred 4 years earlier that did not have anything to do with the corporation. Was a purpose to avoid federal income tax or B. 357(b) apply? -Ct. 357(a) and NOT trigger Sec.35 Problem 1 (b)(1)(i) What is the implication of the fact that the debt is for gambling expenses? 357(b) – If in taking into account the nature of the liability and the circumstances of the assumption it appears that the principle purpose of the taxpayer A. then the amount of the liability secured by such property constituted boot Campbell v. 357(b) -Does Sec. -Generally an old and cold debt which secures asset is fine and thus 357(b) isn’t triggered even when debt used for personal in nature. then Such assumption shall be considered boot Estate of Stoll v. the Corp. not right before incorporation. debt was not transferred to avoid taxes. assuming Jessie’s personal debt (gambling debt) has no bona fide business purpose. Rule If it is a new debt it is probably okay under 351(b) if it relates to business If it is a new debt it is probably not okay of it does not relate to business If it is an old debt it is probably okay even if it unrelated to business when it is incurred but it secures business assets -Jessie’s Tax Consequences: -Realized Gain: 90k = AR: (250k stock + 100k debt relief) – AB: (260k) -Recognized Gain: 90k. Commissioner: tax court held that where an individual incurred a debt just before engaging in a 351 transaction and the property securing the debt was a life insurance policy and was not transferred to the corporation. -usually if debt is personal and NOT secured by asset transferred = no bona fide business purpose.
Part B(1) (1) Beth plans to form Y Corporation to operate a clothing business. -Basis in Land: 350k = AB 260k + 90k rec.000 mortgage. thus no tax avoidance.000.36 Problem 1(b)(2) -Jessie’s Tax Consequences: -Realized Gain: 90k = AR: (250k stock + 100k debt relief) – AB: (260k) -Recognized Gain: 90k. -Code looks at reason for Assumption of Debt. AB = 100. -1st 351 -2nd 357(a) -3rd 357(b) -4th 357(c) -this is where the train stops. Sec. 357(b)(1)(B). and this does not satisfy bona fide business purpose. then basis is 160k = 260k – 100k debt relief. 1032. Beth will receive 20 shares of Y stock (FMV = 180. Y will use the building as a retail store. Sec. -Stock Basis: 250k = AB: 260k – 100k debt relief + 90k rec. which represents the remaining principal balance on a recourse loan that Beth incurred to purchase the building several years ago. no tax avoidance and has bona fide business purpose). -Beth’s Tax Consequences: -Realized Gain: 300k = AR: (180k Stock + 120k debt relief) – AB: (100k) -Recognized Gain: 20k. -Corp’s Tax Consequences: -No gain. 357(c). Section 2. In exchange for the building. Sec. 362(a). 357(c) Liabilities in Excess of Basis -Aggregate Liabilities > Aggregate AB = . gain.000) previously held out for rental. -BUT what about bona fide business purpose? -debt is unsecured was incurred for business separate for corp’s business. Sec. then ok. – this is old and cold debt. and Y will assume the mortgage debt encumbering the building. -Sec.000). -Unsecured Debt was used to fund deductible operating expenses of now failed sole proprietorship parking lot. 358(a). Beth will contribute a building (FMV = 300. gain. The building is subject to a 120. -(if debt is old and cold and securing transferred asset. -This debt does not look like for Tax Avoidance purposes b/c not incurred in anticipation of forming Corp. -if no 357(b). ***** In-Class Examples Chapter 3.
(b) Ex. -Character of Gain: Ordinary Income b/c of Sec. -Stock Basis: 0 (zero) = AB: 10k – 30k debt relief + 20k rec. 357(c) applies. -Stock Basis: 100k = AB: 100k – 120k debt relief + 120k rec. 357(c) apply. 351. Liabilities in Excess of Basis Problem 1(a) -Bonnie’s Tax Consequences: -NO gain. b/c Aggregate Liabilities: 30k > Aggregate AB: 10k = 20k. Sec. b/c 20k = 120k liability – 100k AB. Sec. 1.000 mortgage secures a bank loan that Beth recently incurred in anticipation of forming Y and having it assume the debt. 357(b) and Sec. Sec. 1231 property. 357(b). -Corp’s Tax Consequences: -NO gain. 1245 could apply to recapture depreciation. then 1239 could apply but problem is that SH owns 50%. -Stock Basis: 50k. -Clyde’s Tax Consequences: -Gain Realized: 70k = AR: (50k Stock + 30k debt relief) – AB(10k) -Gain Recognized: 20k. 2. -Does Sec. Chapter 3. 358(a)(1). 358(a) and 358(d). -We are looking at the SH’s AB in property transferred. 1239. 358(a) and (d). 362(a) Sec. 357(c) (2) Same facts as in (1) except the 120. SH and Corporation are related parties. 357(b) apply? -No. -RA: Sec. 357(c). meaning Beth recognizes 20k gain in exchange. Sec. Sec. b/c the debt is PMSI for limo. -Does Sec. Part B. 357(b) Trumps Sec. -Both Sec. -Recognized Gain: 120k. -Reg. . -Character of Gain: This is probably Sec. the Stock Basis = 0 (zero). 357(c)(2)(A) says to use 357(b) when it applies instead of Sec. If 1245 does not apply. -every time Sec. not more than 50%.358-2(a). Beth used the loan proceeds to purchase a personal residence. -Sec.37 Recognized Gain. 357(b) b/c Sec. gain. gain. 357(c) applies. so 1239 does not apply. Sec. -Beth’s Tax Consequences: -Realized Gain: 200k. gain. so no tax avoidance and is bona fide business purpose b/c limo is for use in limo services of Corp. -Stock Basis: 0 (zero) = AB: 100k – 120k debt relief + 20k gain rec. 357(c) apply? -Yes. 1032. -Basis in Building: 120k = AB 100k + 20k rec. 357(c). Which do you use? -We use Sec.
gain. -Basis in Limo: 30k = AB: 10k + 20k rec. -Lincoln Limo: 48k. Sec. have 60k recognized gain. 358(a). 362(a). b/c Aggregate Liability: 40k < Aggregate AB: 60k. -Recognized Gain: 0. 1. -Basis: -MB Limo: 12k. -Stock Basis: 100k.500/350k) * 60k. Problem 2 -Patty’s Tax Consequences: -Realized Gain: 310k = AR (250k stock + 100k debt relief) – AB (30k + 10k) -Recognized Gain: 60k. -Does Sec. 351.357-2(b) Example 2. 357(a). -Sec. but won’t have to do that on exam. AB: 40k -Thus. 1. 1032. 357(c) is applied SH by SH. Sec. Problem 1(b) -Bonnie’s Tax Consequences: -NO gain. 357(c) apply? -NO. (Relative FMV) -use ratio: (FMV of asset / FMV of total assets) * Rec. 1032. Reg. (d).357-2(a) says use aggregate of liability against aggregate AB. Sec. -Corp’s Tax Consequences: -NO gain. 357(c) applies b/c Aggregate Debt: 100k > Agg. . -RA: -Gain from Land = 15k = (87. -Character -not determined by using asset-by-asset approach. No direct authority. Sec. Gain.500/350k) * 60k. but use Reg. 362(a). (100K debt relief – 40K AB) -Sec. Sec. -Clyde’s Tax Consequences: -Realized Gain: 80k = AR: (100k stock + 25k debt relief + 15k debt relief) – AB: (48k +12k) -Do we calculate debt relief on Asset-by-Asset Basis? -Not sure. -Gain from Warehouse = 45k = (262. Sec. 351 – 357(a) – 357(b) (n/a b/c have bona fide business purpose and no tax avoidance) – 357(c) -Sec. 358(a)(1). -Stock Basis: 20k = AB: (48k + 12k) – Debt Relief (25k + 15k).38 -Corp’s Tax Consequences: -NO gain.
not more than 50%. -meaning. Problem 3(a) -Non-Recourse Debt that is subject to. -meaning subject to = assumed for Non-Recourse Debt. subject to does not equal assumed for Recourse Debt. 1032. -the Rule for Recourse is: -Sec. Ex. -Corp’s Tax Consequences: -0 gain. -NOTE: could have 1250 recapture gain for warehouse. 2 (see above). -Sec. gain. then gain would be attributable to asset with all appreciation. -NO 1239 application b/c Patty only owns 50%.39 -As a result. -As a result. has assumed the Recourse Debt if facts and circumstances show that Corp. 357(c) refers to liabilities assumed by Corp. assumed the debt. -Stock Basis: 0 (zero) = AB (30k + 10k) – 100k debt relief (boot) + 60k rec. -Basis -Land: 25k = 10k AB + 15k rec. 357(d)(1)(B). (from above – Relative FMV Approach) -Warehouse: 75k = 30k AB + 45k rec. 1. which says a non-recourse liability shall be treated as having been assumed by the transferee of any asset subject to such liability. . -RA: Land: 25% = (77. -And for 45k warehouse gain is 1231 gain.357-2(b). gain. -Another method is: -Relative Appreciation Method -(Asset: FMV – AB / Total Assets: FMV of all – AB of all) * Recognized Gain. 358(a) – 358(d).500/310k) Warehouse: 75% = (262. 15k land gain is LTCG/1231 gain. did not expressly assume the recourse debt? -the rule for Recourse Debt is different from rule for Non-Recourse Debt. 358(d)(1)(A) says that Corp.500/310k) -NO clear answer on what method to use in Code or Reg’s. Allocation of Basis Methods: -How do we allocate 357(c) recognized gain to each assets’ basis? -use Relative FMV Method as seen in Reg. -Sec. but not expressly assumed. Problem 3(b) -What if debt is recourse and Corp. NOTE: if asset had no appreciation. gain. -assume debt is recourse if not stated as non-recourse. -Look at Sec. the answer to Problem 3(a) is same as Problem 2.
-Also. AND Sec. the transferee corporation has agreed to pay the debt and is expected to pay the debt. 357(c) gain. And Non-Recourse Debt on Building = 120k. 362(a)) . -NOTE: there is no req’t that SH be relieved from being liable for the debt. Rul. SH does not need to tell Creditor that Corp. regardless of whether or not the transforer SH has been relieved of liability vis-àvis the creditor.) says Yes can eliminate 357(c) gain b/c SH’s AB in Promissory Note = 0 but Corp’s AB in Promissory Note = Face Value of Note. Rul. -look at facts and circumstances to determine if Corp. then assuming debt argument fails!? Rule for Recourse Debt -Recourse Debt is treated as having been assumed only if. then William would be transferring 350k FMV property for 250k FMV stock = that is disproportionate?? -if got 350k FMV stock. -Answer: the Corp. takes transferred basis (Sec. How to reduce or eliminate Sec. 68-629 says that Beth has 0 (zero) basis in Promissory Note. we have 20k Sec. assumes the Recourse Debt. agrees to and actually assumes) the Recourse Debt for Sec. Building has FMV of 300k and AB of 100k. based on all the facts and circumstances.40 BUT: DOES = ASSUMED FOR NON-RECOURSE -you need Corp. 68-629. 357 to apply. -the Corp. 2-Tax Court says NO b/c adopted Rev. -Problem is that Corp. has assumed debt. 357(c) Gain? -EX: Beth transfers Building to Corp. assumed debt b/c William got 50% interest and Evan got 50% interest. must be agreeing to pay the debt b/c look at economics of transaction. expressly assume debt. 3-Lessinger (2nd Cir. 357(c) looks at Corp’s AB in Promissory Note. Look to see if amount of stock SH’s got is proportionate. -no req’t that Corp. (proportionate approach). -Would Beth giving Promissory Note valued at 20k eliminate 357(c) gain? 1-IRS says NO b/c Rev. So. b/c if not assuming 100k debt. to actually assume (that is Corp.
-In SH’s hands. -Why is this result right? -b/c payment with promissory note is the same as payment with cash. brings up the fact that Corp. fails to pay Cr’s (b/c b. Therefore. -Professor says that Peracchi is incorrect and argues that AB in Promissory Note = 0. -So. which is not allowed to eliminate 357(c). . 362(a) can’t get to that AB result. says that SH does have AB in promissory note = Face Value of the Note. -Sec. 357(c) gain is eliminated b/c Aggregate AB of transferred assets = Aggregate FMV of property. -BUT the problem with this is that Cost Basis principles do not apply to 351 exchange. -can make argument that purpose of 357(c) is to avoid negative basis. takes a transferred basis. SH must have had AB in the promissory note? -BUT this does not work. then SH gets 1012 cost basis in Stock. Lessinger has no statutory support in saying Corp. -Reasoning: if SH buys stock with a promissory note from Corp. AB of promissory note = 0 b/c is a liability. is subject to bankruptcy. and is wrong. so Creditors can enforce it if Corp. 1031 allows for basis credit for promissory note. -NOTE: SH getting loan from Bank and using borrowed money (cash) in 351 exchange does avoid 357(c). -BUT 9th Cir. -Ct. And.) says Yes can eliminate 357(c).). -Should standard be Basis in Promissory Note if truly enforceable or if Corp. so isn’t that zero?? So. now Sec. that’s a problem b/c Corp. the Corp. Plus.. So. if bankrupt. this is similar to SH guaranteeing Corp’s debts.r.41 in Promissory Note. files for bankruptcy. may not ever collect on promissory note (may not enforce note). SH pays off debt. Commissioner (9th Cir. has Face Value basis and in saying that 357(c) looks at Corp’s AB. -What about fact sole SH wholly owns Corp? -yeah. + debt may not be bona fide. -meaning. goes bankrupt is that SH pays only when Corp. 4-Peracchi v. is subject to bankruptcy? -the problem with standard being if Corp.
-Tax Court Basis in Land = 1.5 mil. and Recourse debt (Mortgage) of 120k to Corp. b/c says promissory note has AB of Face Value = 500k. b/c Agg.3 mil.7 million AR: (1 million stock + 1. We don’t know. Tax Court. -Lessinger and Parachi (transferred basis) -Tax Court: 0 or 500k basis. -Gain Recognized = 200k -Stock Basis = 0. -Corp’s Tax Consequences: -Basis in Land: -2nd and 9th Cir. so 357 applies. 9th Cir. 357(d)(1)(A). -problem with giving Note a zero basis is that if Corp. 357(d). AB 800k + 700k rec. take the Building subject to the 120k Recourse Mortgage. gain.. AR: 2. 1-Now. AB (1. -Basis in Promissory Note: -2nd and 9th Cir: 500k. argue 2 Cir.: 1. and have in agreement that Corp. argue what happens in the 2nd/9th Cir. Liab. 2-Now. . debt relief + 700k rec. in Basis in Land = 1 million.. Problem 4 (p. Sec. gain. -now.5 mil.) – 1. -as a result. AB 800k mil. AR: 2. agrees and is expected to pay 100k and Beth agrees to pay 20k. gain. -What about Sec.5 mil. 357(b) apply? NO. -Gain Realized = 1. 357(c)? -Yes.On Exam.2 million. AB (800k) – 1. and receives 180k Stock. + 200k rec.5 million > Agg. debt relief + 200k rec. -BUT we can’t do this for Non-Recourse Debts b/c “subject to” is enough. potential gain of 700k b/c Agg. no 357(c) gain b/c 100k = 100k. gain. – AB: 800k.5 million debt relief) – AB: (800k) -Recognized Gain: -we have a liability that has been assumed. and Discuss why and why not 2nd or 9th is wrong. AB by 700k. -How do we eliminate 357(c) gain? -have the Corp.5 million.3 mil. 11) -Edmund’s Tax Consequences: -Realized Gain: 1.42 Example: Beth transfers Building with FMV of 300k. Note has basis = Face Value. -This has statutory basis b/c of Sec.7 million. assumes 100k recourse mortgage. nd -. AB: 800k. – AB: 1.5 mil. Liab. -Does Sec. Corp. -Gain Recognized = 700k. -Stock Basis = 0. > Agg. sells Note. what if Tax Court is authority: -Gain Realized = 1. AB of 100k.
. -Jack’s Tax Consequences: -Realized Gain on A/R: 60k. Do we have assumed liabilities? -Yes. -look at Lessinger for more info. Sec. 12-13) Problem 1 -Why does Jack’s A/R have AB of zero and Abe’s A/R have a AB of 60k? -b/c under cash method which Jack uses. income is included in GI when it is earned so Abe takes Tax Cost Basis of 60k b/c already reported GI of 60k. 357(c)(3). Assumption of Debts that Would be Deductible When Paid. (60k – 0) -Realized Gain on Equipment: 12k. This example’s promissory note is more likely to have Basis b/c have another SH to enforce the note. Problems (p. 1. 2. -whereas under accrual which Abe uses.43 there is phantom gain. income is not included in GI until it is received. This example is better than the 2nd and 9th Cir. cases. (40k – 28k) -Recognized Gain: 0. so 357(d) is satisfied. 357(b) issue? NO.
for accrual method. AB 28k. (40k – 28k). -we do count A/P as liability under 357(c) b/c already took the deduction. counting A/P as liability would mean over-statement of liabilities. -A/R: 0k. we take into account the A/P for 357(c). 4. -so. -RA: the A/P of 55k is Sec. (60k – 60k) -Realized Gain on Equipment: 12k. -351(a) – 357(a) – 357(b) – 357(c). the Corporation is taxed on that income. -RA: the 25k Purchase Money Mortgage does not give rise to deduction and it gave rise to increase in basis. 55k + 25k > Agg. so he has not recognized tax benefit yet. AB: 28k. 25k < Agg. Rev. -Corp’s Tax Consequences: -Basis (in Jack’s): -Office Equipment: 28k. and Jack has no 357(c) gain b/c Agg. -Stock Basis: 3k = AB: 28k – 25k debt relief (358(d)(1)) -Sec. 357(c)(1). So. 357(c)(3) liability b/c paying it off gives rise to deduction. when Corporation collects the 60k. -Recognized Gain: 0. 357(c)(3)? -357(c)(3) says for purposes of applying 357(c)(1). -Abe’s Tax Consequences: -Realized Gain on A/R: 0. . 80-198. What about Sec. we exclude the 55k A/P from the Sec. a liability is excluded if payment of liability would give rise to a deduction and the incurrence of the liability did not result in increase of basis of any property. Rul. 357(c) issue? -potentially yes we have a 52k gain. 357(c)(3) – meaning exclude 55k A/P in determining stock basis. 358(d)(2) says to exclude any liability excluded by Sec. -As a result.44 3. Liab. -Agg. Liab. -Reasoning for 357(c)(3): Jack has not taken deduction on A/P. -so. -Assignment of Income Doctrine does not apply b/c IRS acknowledges that applying assignment of income in 351 exchange would not allow for tax-free exchange.
Liab. for awards and prizes). Problem 1(b) -Corporation reports income and is taxed on collection of Jack’s A/R. 357(c) gain: potentially 10k b/c Agg. 162) on payment of Jack’s A/P. See Rev. there is no recognized gain. 358(d)(2). -Does Sec. b/c the 50k liability to pay prize is a Sec. Liab. AB 40k. 95-74. -Corp’s Tax Consequences: -Basis (in Abe’s): -Office Equipment: 28k. -Sec. no 357(c) gain. 80k. -So. Problem 2 Prize Liability -Louis’ Tax Consequences: -Realized Gain: 210k = AR: (200k stock + 50k debt relief) – AB: (40k). the incurrence of this liability did not increase basis of any property. -A/R: 60k. but can be applied to Accrual Method if economic performance is delayed (i. -Stock Basis: 8k = (88k – 25k – 55k). -So. 357(c)(3) includes both liabilities with deductible expenses and with capital expenditures. -Don’t decrease by 50k b/c of Sec. we’d still apply 357(c)(3) -Stock Basis: 40k. -358(a) – 358(d) – 358(d)(2). -Sec. 357(c)(3) apply? -Yes. -NO income is reported/taxed on collection of Abe’s A/R b/c already reported by Abe. which is correct b/c 50k of 210k was . AB: 88k > Agg. Problem 1(c) -Corporation takes deduction (Sec. we have preserved 160k gain. -NO deduction is allowed when payment of Abe’s A/P b/c already deducted by Abe. -So. rev rul 95-74. Also.45 -Agg. prize under §461(h) isn’t deductible until paid -So. 357(c)(3) usually goes to Cash Method. (assume Louis is cash method TP). -Recognized Gain: 0.e. Rul. -NOTE: Sec. 162 deductible expense. 50k > Agg. even if Louis used Accrual Method.
Corp. Agg. 358(d)(2) still applies for liab. 357(c)(3) applies to deductible expenses and capital expenditures b/c TP has not recognized tax benefit yet. 358(h) -Toxic’s Tax Consequences: -Realized Gain: 200k = AR: (100k stock + 400k debt relief) – AB: (300k) -Recognized Gain: 0. -Sec. -contingent environmental liabilities would not be taken by Accrual Method TP until paid (b/c of economic performance test and All Events Test). if we don’t. what if Prize = 40k instead of 50k? -As a result. -Potential Sec. will take deduction. -Corp’s Tax Consequences: -Basis in Book Inventory: 40k. we have no potential 357(c)(3) gain. and IRS says even if Liab. 357(b) applies if principle purpose of exchange is to avoid taxes. 358(h). Now. -But this does not happen. the transfer does have bona fide business purpose b/c Brownacre is transferred to Subsidiary. 357(c) gain: 100k. pays 50k prize. Sec. 358(d)(2) for basis purposes? -well. doesn’t exceed Basis. -As a result. 400k > Agg. then Louis’ stock basis = 0. -Also. Problem 3 Sec. This transfer in itself was not for tax avoidance purposes. -Stock Basis: 100k. when Corp. AB 300k. described in 357(c)(3) so that stock basis is not decreased. Plus. Liab. this 400k liability is excluded for purposes of 357(c)(3)? -Sec. -So. . do we still apply Sec.46 going to be a deduction for payment of prize.
the TP’s stock basis exceeds FMV of stock received. This is a Contingent Liability Tax Shelter.000 in cash. Who is included in control group? (control group) 2. and Chad. -3 Questions: 1. Bill will transfer equipment worth 50. Ann will transfer 50. it was operated. -RA: decrease stock basis by 400k 357(c)(3). If it was operating as trade or business. thus stock basis is FMV of stock = 100k. Section 3 Who is included. Capital Expenditure: when asset will extend past current taxable year. exception applies. . Congress put an end to this by enacting Sec. and person assumes the liability. What does immediate after the exchange mean? In-Class Examples Chapter 3. 358(d)(2). 351(a). What does control mean? (issue when there are multiple classes of stock). -Sec.000. and Chad will transfer land worth 50. 368(c). Each will receive 10 shares of X stock. 358(h): if liability is associated with a trade or business. Bill.47 -if Stock Basis = 300k as stated by Sec. -the transfers do not have to be simultaneously. 358(h). but that is below FMV. RA: exception does not apply b/c Brownacre is not a trade or business. it takes a 200k Capital loss. then reduce stock basis by Sec. -If after applying other provisions of 358. counted in Control Group? (1) Ann. 3. Bill. 357(c)(3) liabilities (but do not decrease basis below FMV of stock received). capitalize! Section 3.000. -Corp’s (Chimera’s) Tax Consequences: -Basis in Brownacre: 300k. and Chad agree to form X Corporation. -Exceptions to Sec. Will the control requirement be met? -the Control Group includes Ann. Instead. The “Control” Requirement -Sec. and Sec. then when Toxic sells stock for 100k. 358(h) applies when AB of property transferred exceeds FMV of stock received. the transfers may take place over a number of days or even months.
000. it can also apply to later transfers. Dana is not . and Eric owns the remaining 5 shares.000). -Sec.000). 351 is not limited to initial transfer.000) to Y in exchange for 5 additional shares (FMV = 5. .000 in cash to Y in exchange for 1 additional share (FMV = 1. Property transferred by that SH is of relatively small value in comparison to stock already owned by that SH. Meaning. 77-37 that if property transferred = at least 10% of stock already owned by SH.000). -Eric is only property transforer. -RA: 1k/90k does not equal at least 10%.000) to Y in exchange for 5 additional shares (FMV = 5. AB = 1.48 -IRS and Courts ask if property transfers are pursuant to an agreement at the time of the 1st transfer. Dana does not transfer any additional property. -IRS says in Rev. The Y stock has a FMV of 1. he lacks control under 351(a). Will the control requirement be met in the following alternative scenarios? (a) Dana transfers additional property (FMV = 5. and thus is a taxable event. BUT . Since Eric owns 10 of 100 shares. Dana owns 90 shares. the primary purpose of that transfer by that SH was for the transfer to qualify for control under Sec.351-1(a)(1)(ii) Relatively Small Value – Who in Control Group? (c) Eric transfers additional property (FMV = 5. (b) Reg.351-1(a)(1)(ii) says if existing SH transfers property for stock. 1.000) to Y in exchange for 5 additional shares (FMV = 5.000. Eric can qualify under Sec. -Now. that SH will not be included in control group if: 1. 351 only requires that Property Transforer is in control immediately after exchange. is satisfied b/c Dana owns 95 of 100 shares. delay is ok.000. Sec. the control req. . thus Dana’s transfer is of relatively small value (satisfies element 1). in this question. so we only look at his ownership of shares. 351 control req’t. AB = 1. Dana transfers 1. -Reg.000). 351. Proc. then it is not relatively small value. (2) Y Corporation (which was formed several years ago) currently has 95 shares of stock issued and outstanding. So. 2.000 per share. And. we have to determine what the primary purpose of transfer is – it appears that this is the case (so element 2 is satisfied). AB = 1. Now. 1. And. Eric transfers additional property (FMV = 5. -So.
49 included in Control Group for Sec. and Class D nonvoting preferred stock. AND -look at voting stock. Rul. at least 80% of Voting Power. Meaning. this is applied on aggregate basis. Class C voting preferred stock. 351(a) is in Sec. at least 80% of the total shares of all other classes of stock (that is Non-Voting Stock). which says Control means owning: 1. 2. (3) Z Corporation has 4 classes of stock outstanding: Class A voting common stock. -Answer: Eric’s transfer is a taxable event. After transferring property to Z in exchange for stock. SH must own at least 80% of stock in each class of nonvoting stock. 368(c). Meaning of Control -Definition of Control for purposes of Sec. not class-by-class. Fran’s stock ownership in Z is as follows: Class A VCS Class B NVCS Class C VPS Class D NVPS . -Rev. 59-259 says that non-voting test is applied on a class-by-class basis. Class B nonvoting common stock. and Dana’s transfer is non-recognition. 351 purposes.
Yes. this element is satisfied b/c Fran owns 100% of each class of non-voting stock.5% by multiplying 90% by 75% and 10% by multiplying 100%. Fran may elect 67. BUT it is still treated as stock for Sec.50 Owned by Fran Total (a) 300 400 200 200 100 100 200 300 The Class A and Class C shareholders are entitled to 1 vote per share. Is Fran in control of Z? -Application of 2-Part Test of Sec. Meaning. instead of having 1 vote per share. . Fran owns at least 80% of voting stock b/c Fran owns 400 of 500 shares of voting stock (power). and the Class C shareholders are entitled to elect the remaining director. 2. we look at what % Fran may elect of each class. RA: 1. No.5% + 10% = 77. meaning NQPS is still stock for the Control req’t. Not satisfied b/c .5%. 351(a). the Class A shareholders are entitled to elect 9 out of the 10 directors on Z’s board. Meaning of “Immediately After the Exchange” (4) Gary and Helen form W Corporation. but only owns 2/3 of D NVPS. . AB . -Get 67. Class A VCS is 90% and Class C VPS is 10%. Also. (b) (c) Assume instead that Fran owns all 300 of the Class D shares. Now. b/c Fran owns 100% of Class B NVCS. -So.000. 368(c): 1. the answer is the same as 3(a). Does your answer to (a) change if the Class D nonvoting preferred stock is nonqualified preferred stock (as defined in § 351(g))? -NQPS is treated as boot for purposes of Sec. Gary transfers property (FMV = 10. Yes. Is Fran in control of Z? -So. -You determine this based on number of directors each voting class may elect. 2. 368(c) purposes.
A few months later. and what each test says.51 = 5.000) to Kim. then multiple steps = single transaction. -Remember re-characterization of disproportionate transfers (see above). and the issuance of 30 shares to Kim is intended as a gift.000) to JK Corporation (a newly formed corporation) in exchange for 70 shares of stock (FMV = 70. Binding Commitment Test -if at time of 1st step. End Result Test -if all steps are part of pre-arranged plan to reach a particular end result. then treat multiple steps as single transaction. 3. 2. -Steps Transaction Doctrine -a judicial doctrine developed by Court to treat multiple transactions as a single integrated transaction if the steps are sufficiently related.000 in cash in exchange for 10 shares of W stock (FMV = 10. In connection with Jill’s exchange.000) in exchange for 10 shares of W stock (FMV = 10. so Gifts after transfer do not break control requirement of 351(a). then subsequently gifting the 30 shares to Jill. (5) Jill incorporates her sole proprietorship by transferring the business (FMV = 100. .000).000). Mutual Inder-dependence Test -if the steps are so legally inter-dependent that if completion of one step would be pointless without all other steps completed. -this applies to many corporate cases. treat multiple steps as single transaction. -3 Variations of Test: 1. JK also issues 30 shares of stock (FMV = 30. then Gary has taxable event. -Difficulty: which test to use? And what does mutual inter-dependence mean? For this class. Helen transfers 5 shares of W stock to Ivan. The actual correct analysis is not as important. -Gifts are not a binding contract. we need to understand that this test may apply. The gift would be disregarded for control req’t even if Kim intended to make gift at time.000). Does Jill’s exchange qualify for nonrecognition treatment under § 351(a) in the following alternative scenarios? (a) Kim is Jill’s daughter. Does Gary’s exchange of property for W stock qualify for non-recognition treatment under § 351(a)? -When do we measure Control? After 1st exchange? Or after Helen subsequently transfers share to Ivan? -If control req’t is not satisfied. who does not transfer any property to JK. -Courts treat this scenario as Kim receiving all 100 shares. there is binding commitment to engage in subsequent steps. Helen transfers 10. not just 351(a).
Sec. Same facts as in (b) except Kim also transfers 25. -As a result.52 (b) Kim was a key employee of Jill’s sole proprietorship business. 1-What are tax consequences if Steps Transaction does not apply? -then Bill’s transaction is treated as separate from other subsequent transfers by Underwriter. and Underwriter getting common stock for services is all part of one step.351-1(a)(3) says . Jill would not have control under 351(a). -Merril-Goldman: no. Meaning. -So.000 in cash to JK in exchange for 25 additional shares of stock (FMV = 25. v. -so.000). 13-14) Problem 1 -Facts are similar to American Bantam Co. b/c transferring services for Stock. Jill and Kim entered into a contract. 2-What are tax consequences if Steps Transaction does apply? -Now. Kim would receive an equity interest when Jill later incorporated the business. which provided that in exchange for her services as an employee of the sole proprietorship business. -AB in Copyright: 1k. and transfers b/t property transforers does not break control. -Stock Basis: 1k. 1st 100 shares to Jill and 25 shares to Kim. so it’s a taxable event. b/c transferring property for Stock. b/c Reg. Transferred Basis in Copyright. control req’t under 351(a) is satisfied. they are just shifting ownership b/t property transforers. -There is a Binding Contract in this scenario b/c Kim had binding right to receive shares at incorporation. Commissioner. 1st all 100 shares to Jill. Underwriters sale to public. 351(a) – Bill is in control immediately after his exchange. Control Group = -Bill: yes part of control group. then deemed transfer of 30 shares from Jill to Kim in accordance to binding contract. The Control Requirement (p. -Public Investors: yes part of control group. Several years ago. we have to look at all steps combined. Bill’s transfer. -Doors: -non-recognition. 351(d)(1) says services are not treated as property for 351(a). -so. Exchanged Basis in Stock. (c) Section 3. 1. 1032. Meaning. Steps Transaction applies. -the point here is that Kim is a property transferor. -Bill: -non-recognition of gain b/c of Sec. Then deemed transfer of 30 shares from Jill to Kim. -so.
1012. Does Steps Transaction apply? 1-Binding Commitment Test -facts are not entirely clear about when contract was set up. so doubtful there was a binding contract. -Q: in American Bantham. Cost Basis. Court held that steps transaction did not apply b/c there was no binding contract at initial transfer.53 what to do when person receives stock from qualified underwriter. even when contract was entered into. then Control Requirement is not satisfied. -Again. 1001. plus contract did not provide absolute right that Underwriter would receive common stock (it was a contingent right). Bill and Public Investors own 75% of Voting Power. Meaning. control req’t not satisfied b/c Bill and Public own 0% of that nonvoting class. -Look at American Bantham where Court said there was no binding contract set up before or at time of initial transfer. courts rely on the mutual interdependence test. -has a 10k Cost Basis in Stock. meaning fail the Voting Power req’t of 368(c). -Assume that Common Stock given to M-G for services if Non-Voting Stock. Plus. so Binding Commitment Test does not apply to this scenario. -So. -Look at Control Req’t: -Assume that Common Stock given to M-G for services is Voting Stock. include Public Investors in Control Group. -Remember 1032 still gives Corp. 1012. Associates have non-contingent binding . Also. -Answer: if steps transaction applies. what if Underwriter had absolute right to shares? -A: then this would be a binding contract b/c there is no absolute right of Associates to retain the shares. non-recognition even when 351 does not apply. taxable event for Bill. -Corp: -non-recognition of gain. -NOW. -basis in asset is 10k. would Associates entering into contract prior to initial transfer result in Steps Transaction? -A: what about the contingent right of Underwriter? -a contingent contract/option contract does not trigger the Steps Transaction Doctrine. it is like Public Investors are treated as transferring cash for stock directly from Corporation. -in American Bantham. Instead. -As a result. there was no complete obligation for SH’s to transfer stock to Underwriter. -Bill: -recognizes 9k gain. -Q: Now. Associates kept stock in escrow which showed ownership by Associates. 1032.
-was there an independent business purpose for transfer of copyright to doors? Or. but Doors had other options (i.54 commitment to sell/give shares to Underwriter. Problem 2(a) Donald Thump Land FMV .100K Building FMV .2. -this test may have some play here b/c Doors had to gain more capital to operate. but still we need to know what result is? -But like American Bantham. 2-End Result Test -question is whether all the steps were pursuant to pre-arranged plan.9M Gain realized Land is 15% . 3-Mutual Inter-dependence Test -applies if steps are so inter-dependent that if legal significance of one step would be pointless without other steps. which facts do state.22M Apprentice Corporation 100 shares of stock = 20M (1 sh = 200K) Asset SALE 20M Land/ Building 11. develop.135K tax Building is unrecaptured §1250 .75M TOTAL TAX = 2.e.19M AB . End Result Test would probably not apply just b/c of pre-arranged plan.115M . that public offering was necessary for that 1st step? -b/c yes Doors needed additional capital. loans) to generate capital. and market software.1M AB .8M Original Cost .25% .885M Net after cash = 17. -NOTE: courts hold that employee’s having option to receive stock does not break control for 351(a) purposes. -American Bantham said steps were not mutually inter-dependent b/c 1st initial transfer had legal significance independent of other steps.
365M Problem 2(b) -see notebook (back of page 12) for diagrams. see Rev. yes Thump’s 2nd transfer of stock was non-taxable b/c both Jose and Donald 100% own Las Margarita’s after transfer. -thus. then treat 1st transfer as nonrecognition under Sec. -plus. -2nd thing to look for is whether this end result in an alternate route that would have satisfied Sec. 351(a) b/c SH is continuing 1st transfer. Jose’s transfer has bona fide business purpose. Rul. which means state taxes – that’s why they did it other way (way in problem). -Question is whether Donald Thump’s 1st transfer of Hotel to Apprentice satisfies control requirement of Sec. .9M 15% Net after tax cash = $17. 351(a)? -in this problem.1M = 10. 2003-51. Rul. Then. 4 million FMV of building is 10% of 40 million FMV of all stock in Las Margarita’s. yes this could have been accomplished by Thump 1st transferring Hotel to Las Margarita’s and Jose transferring Restaurant to Las Margarita’s. have 2 transfers of real property. is there any authority saying it should not apply? -Yes. 2003-51: if subsequent transfer is non-taxable. Plus.55 Incorporation §351 gain = 0 §357 issues = 0 (None) Basis in the stock (358) = BPT = Not tax free under §351 immediate sham transfer offer is lower than what had been offered possible argument for 351 if offer had been the same Donald must recognize gain of 19M . -Rev.8. -Even if Steps Transaction applies. 351(a) when Donald Thump subsequently transfers stock? -Requirements: -1st thing to look for is whether 2nd transfer (that is subsequent transfer) is non-taxable? -in this problem. Las Margarita’s could transfer Hotel to Apprentice Corp.
which it looks like won’t happen till year 4. -extends non-recognition to stock for services. 1032. 351(a)? -NO. B. and each take a stock basis equal to FMV of stock received. is entitled to deduction for stock paid to D for services. Making election means D reports income = to FMV of stock today (year 1). See Sec. b/c they do not own 80% of stock. Problem 1(a) -Debbie’s Tax Consequences: -Debbie. who received stock for services. -Also. -non-recognition for D’s transfer b/c of Reg. 1. -Do A. Sec. -See Sec. 83(b) Election? -Yes.1032-1(a) says that stock issued for services is deemed to be issued for cash or other property. Receipt of Stock for Services. does not qualify for Sec. -if make election. D could make election if she thinks the stock is going to appreciate in next 4 years. -Basis is Cost Basis in A. Sec. 1012. -What about Sec. -D will include FMV of stock in year 4 as gross income. 351(a) b/c of Sec. C transfers. C’s property contributed. 162 and Sec. and C qualify for Sec. Sec. B. then have to capitalize it. 1012. meaning nonrecognition. you don’t get a loss deduction. Corp. D does not have to report gross income until property right (stock) vests. -Corp’s Tax Consequences: -non-recognition for A. Sec. 351(d)(1). B. and stock depreciates. 83(c) says substantial risk of forfeiture is when ownership does not vest until services are completed. -NOTE: if capital expenditure. So. -Debbie’s tax cost basis = FMV of stock. 83(a). these are taxable transactions. they only own 75%. 263. Cost Basis. . Problem 1(b) -now. -Meaning. Risk of forfeiture ends when D is able to sell stock. Debbie reports gross income of FMV of stock. -So.56 Section 4. we have a substantial risk of forfeiture. 83(a).
Letter of Intent -probably property b/c letter of intent was secured by Sean in his own name. Jill recognizes income and gets deduction under 83(h). -Difference is that Jill and Kim. 351 non-recognition. then Transferor of stock (meaning Corp. and the services are done under Sec. 83 applies. Problem 1 was stock for future services. -Still have gross income in Sec. so Sec. 351. then A. it was considered property. 351. **The difference b/t Kim and Jill example and Problem 1 is that Kim and Jill was stock for past services. -So. 2. B. 3. -Stock Basis: 210k. we bifurcate the contribution in services and property. whereas. Meaning. but could make the argument. trade secrets. 3-Fran -no gain/loss. -Sean’s contributions: 1. Exchanged basis. property is treated as Sec.57 -When there is substantial risk of forfeiture. So. The financing commitment was not property of TP -Stafford case: the TP developed the letter of intent (contractual right) in his own name. 351.) owns the stock until property interest vests. all have non-recognition under Sec. Contract with Fall University -probably property b/c contract was secured by Sean in his own name. -Who is in control group under 351? -If service SH also contributes property. -Stock Basis: 90k. -As a result. then that SH is included in the Control group. -if we say it this way. 83 and cost basis in stock. 2-Pat -no gain/loss. Not clear. 83 and treated as compensation for services. Problem 2(a) -What is property? -intangible property include goodwill. licenses. and C could meet control requirement. thus Stafford case should apply. every party in this problem qualifies as property transforer. patents. thus Stafford case should apply. We include all stock/shares owned by Service SH in the Control equation. . Other SH’s: 1-Les -no gain/loss. Services for organizing and supervising buildings -this is services. 351. -But what about contract rights? -James case: the TP negotiated or secured financing agreement in name of Corp. -So. it was his personally.
-Control Group owns 80% of votes.: -Equipment Basis: 90k -Material Basis: 200k. -in this case. -relatively small value is generally considered to be less than 10%. So. yes the Control Group req. and P own 80% of voting power. (need both elements). -Look at Reg. still qualify for 351 non-recognition b/c all SH’s own 100% of voting and non-voting stock. -Voting Power: accumulate all voting classes. -the extra information at end of problem is to have the Control Group’s stock not qualify as NQPS. L. 351. then yes Control Req. Problem 3(a)(1) -E. 368(c). is satisfied b/c control group owns 80% of voting power. and G are property transferors. Problem 2(b) -since stock is participating. -is control still satisfied? -Control Group includes F. P. L. 1. -in 3(a)(1). then whether Sean is included in Control Group matters b/c now Control may not have 80% Voting Power. then Pat’s Stock Basis = 200k and Corp’s basis = 200k. .58 -Stock Basis: 400k. in exchange for stock. -if stock is voting stock. and S (maybe?). F. 362(a) – 362(e)(2) requires basis to be reduced by FMV over AB. it is definitively not NQPS. then do NOT include service provider in Control Group if: (1) the transferred property is of relatively small value in comparison to the value of stock received for services. thus equal our Control Group. -Corp. -RA: even if property is relatively small value.351-1(a)(1)(ii) -if service provider also transfers property to Corp. -BUT if Fran’s stock is non-voting. Sec. -Answer: Sean is included in Control Group. so not included in Control Group. so Control Group still gets 351 non-recognition. -H is contributing services. -If make election. Control Group gets 80% Voting Preferred Stock and H gets 20% Voting Common Stock. to work. make sure property is at least 10% of stock received for services. -thus. AND (2) the primary purpose of the property transfer is to qualify the property transfers made by other SH’s for nonrecognition under Sec. then element 2 of primary purpose is probably not satisfied b/c contracts are for business purpose. is satisfied b/c F.
59 Problem 3(a)(2) -The Control Group does not own at least 80% of the non-voting Class B common stock. -BUT Control Group does not own at least 80% of the NVCS Class C – H owns all 100% of Class C stock. Even if Class B Stock is NQPS. control req’t is satisfied b/c -Control Group has at least 80% of voting power (that is at least 80% of right to vote directors). taxable exchanges. Control Group does not own at least 80% of the Class B Stock. so control req’t of 351 is not satisfied. 368(c) so it still gets counted to determine if control req’t is satisfied. -remember go class-by-class for non-voting stock. . -Meaning. it still does not satisfy control b/c NQPS is stock under Sec. Problem 3(c) -Yes. Meaning. Problem 3(a)(3) -Again. and not based on pure number of shares owned by each group. exchanges are taxable. -point of this problem is to show that you determine voting power based on number of directors class can elect (or based on number of votes compared to total votes). Problem 3(b) -Control req’t is not satisfied b/c -yes voting power is satisfied.
-high debt to equity ratio means under-capitalized corporation and thus means probably equity. -but courts are inconsistent with what ratio is ok.3 million 2. 2-another factor is Debt-to-Equity Ratio (see how thinly capitalized Corp. -problem when controlling SH’s make contribution. **NOT tested on this chapter.5 million 1. Problem 1(a) 1-fact that each SH’s loan is in proportion with stock owned makes it look more like equity. -So. 385. it would be 9 million debt / 1. we’re trying to avoid double taxation b/c Debt is taxed once. 3-interest rate factor. 163). -we have a Multi-Factor Test.** Problem 1: -Balance Sheet: Assets Business Asset Cash Total FMV 3. plus the Corp. is whether the contribution is debt or equity? -this is a Facts and Circumstances Test. -Debt allows Corp. So proportionate loan to stock ownership is more like equity b/c doubtful SH’s will enforce payment of interest on loans.4 million 5.60 Chapter 4: The Capital Structure of the Corporation -See Sec.5 to 1.7 million Debts Bank Note SH Equity 4.7 million Is it Debt or Equity? -remember Debt and Equity are treated differently under Tax Code. . not so with Stock.2 million equity = 7.2 million 5. -But dividends are not deductible by Corp. it’s a weighing test. gets a deduction. to take deduction on paying interest (Sec. is). in this case. -with Debt. Below prime may mean bank would not have made this loan.
Problem 1(b) -fact interest is paid out of profits only looks more like dividends, so really looks like an equity investment b/c payment is dependent on success of business. Problem 1(c) -shows that a debt instrument can later be re-classified as an equity instrument for tax purposes, i.e. when corp. stops making interest payments. Summary of Chapter 3: Corporate Formation -Steps: 1. Does 351 apply? -property -stock -control 2. Is there boot? 351(b)? 3. Liabilities? 357? 4. Character of recognized gain? 5. Stock Basis? 6. Holding Period? 7. Corp’s Basis in Property? -Property: -no comprehensive definition for property, but cash and A/R are property. -but intangible property created by personal efforts of SH are property. (i.e. contract rights created by SH’s efforts and for use by and owned by SH). -if intangible property created for corp., then not property. -Stock: -351 includes all stock, except NQPS, which is treated as boot – remember when determining control under 368(c) include NQPS as stock. -if just receive NQPS, then 351 does not govern at all. -Control: -Service providers not included in control group, unless Service Provider transfers property and provides services. -Reg. 1.351-1(a)(1)(ii), exclude service provider when: (see slide 8) -Remember when including Service Provider, include all the Service Provider’s stock rec’d in measuring control, not just what Provider rec’d for property (but also stock rec’d for services). -Sec. 351(b) rec’ing Boot -recognize realized gain on boot rec’d. -remember if SH transfers multiple assets, gain or loss is determined on asset-byasset basis using relative FMV of each asset. -still can’t recognize loss. -Liability Assumption: -Steps:
62 1. first determine if corp. assumed recourse liability – look at facts and circumstances. 357(d). 2. second determine if lialbity assumed is for tax avoidance or is not for a bona fide business purpose. 357(b). 3. third determine if SH’s aggregate of liabilities assumed by Corp. > aggregate of AB of property transferred by SH to Corp. 357(c). 4. fourth look to see if Sec. 357(c)(3) applies for 357(c) purposes, these are payment of liability that gives rise to deduction or capital expenditure. -look for Cash Method A/P. -Sec. 357(b) v. Sec. 357(c) -357(b) trumps 357(c). -if 357(b) applies, all of SH’s liabilities assumed (not just particular liability) are treated as cash received (that is treated as boot) for Sec. 351(b) purposes, so go to Sec. 351(b) to recognize gain. -for 357(b), look to see if liability was incurred for a business purpose. -if 357(c) applies, recognize gain of liabilities > AB. -SH recognizes gain under 357(c), not 351(b). -357(b) and 351(b) say determine character on asset-by-asset basis, whereas, 357(c) says to determine character using relative FMV of assets or relative appreciation on each of assets transferred by SH. -look at this more!! -Character of Gain: -remember Sec. 1245 and 1239. -Stock Basis: -purpose is to preserve all the realized but unrecognized gain or loss. -focus on how liability assumption affects basis (remember 358(h)). -remember if SH receives multiple classes of stock, then determine basis in accordance to relative FMV of stock rec’d. -NQPS is outside of basis rules under 358. -Holding Period -split holding period in each share of stock. -Corp’s Basis in Property: -look at Sec. 362(e) and how multiple built-in loss assets are affected. -Transfer of Property as Boot by Corp: -if boot property is appreciated, then Corp. recognizes gain on transfer of property as if Corp. had sold asset to SH at FMV. -Sec. 351(f) – Sec. 311(b). -311(b) does not trigger when Corp. transfers own debt instruments or NQPS as boot in 351 exchange. -if boot property is depreciated, then Corp. may not recognize any loss. -Sec. 351(f) – Sec. 311(a). -Disproportionate Exchanges -review it more.
-No 351 application: -SH recognizes gain or loss (remember 267 limitation on loss). sec. 1001. -Stock Basis = FMV of stock rec’d. -new holding period. -BUT 1032 still applies for Corp., and Corp. takes Cost Basis in property rec’d (meaning it equals FMV of stock or FMV of other property transferred to SH).
Chapter 5: Dividend Distributions Section 2: Dividend Distributions in General
Sec. 301(a) applies when Corp. distributes property (as described in Sec. 317(a), which says cash, securities, and any other property, but not stock is property) to a SH, in SH’s capacity as SH. -for example, if SH is also employee of Corp. and Corp. pays him compensation, that is compensation not dividend or 301 distribution. -a stock dividend is not covered by 301(a). -317(a) describes property for this part (301 – 318) not for the part 351 is in. Sec. 301(b) tells us the amount distributed. Sec. 301(c) Amount Taxable. -(1) amount constituting dividend shall be included in gross income. -(2) amount applied against basis, that amount which is not a dividend, shall be applied against and reduce the adjusted basis of stock. -aka return of investment/ capital. -(3) amount in excess of stock basis, if stock basis is reduced below zero, then excess over zero is treated as a Capital Gain (usually LTCG) b/c treat as gain from sale or exchange of stock. Sec. 301(f) Special Rules: -redemption of stock (learn later). Sec. 316(a) says distribution is a dividend if it is paid out of either: 1. Current Earnings and Profits for current taxable year, OR 2. Accumulated Earnings and Profits (accumulated after February 28, 1913). a. Running total of all prior years before current year. Meaning any remaining current E&P gets carried over to next year as accumulated E&P. -Earnings and Profits is Corp’s economic ability to pay out distributions from real economic income instead of out of capital contributions.
3. but represent actual expenses Corp.000 Interest on bond 5.000 *DRD (Dividend Received Deduction).000) DRD 7.000 4 Categories of E&P: 1. subtract out in year taxes were paid).000 Dividend Income 10. -EX: fines.000 Tax Rate * 20% Taxes Paid 12.000 Total E&P: 57. made.000 Depreciation Adjustment 5.000 Fine (4.000) Interest on bond (3. Items not deductible for tax purposes. interest on municipal bond. income taxes (since it is accrual method.000) Capital loss (4. but do not represent actual economic .000) DRD* (70%) (7.Items that are deductible for tax purposes. can use to pay distributions.000) Taxable Income: 60. 243.64 Problem 1 -What are Earnings and Profits: -Taxable Income: GI: Gross Receipts 98.000) Depreciation (8. subtract from year taxes were accrued. excess capital loss.000) Excess capital loss (1. 2. -Earnings and Profits: Taxable Income 60.000) Federal Income Tax (12. Items excluded from taxable income. but represent actual dollars Corp. which is under Sec. If cash method.000 Capital Gain Deductions: Wages (33.
-EX: Depreciation adjustment b/c tax depreciation is accelerated. all 30k distribution is a dividend. but then 30k E&P were earned from July to December? -that is not relevant. 316(a)): 1.000 of current E&P. Return of Basis 4. but there are timing issues. there were zero Current E&P. Current Earnings and Profits 2. Excess over zero basis = Capital Gain. In-Class Examples Chapter 5. Corp. As of January 1 of the current year. use straight line depreciation for E&P. b/c you measure Current E&P at the end of year. -Rule: anytime current E&P is sufficient to pay current distribution. then out of Accumulated E&P. 301(c). X distributed 30. -As a result. must reduce cash by that amount. -Go first to Sec. 301(c) and Sec. -Sec.000. -EX: DRD. Meaning.Items that are deductible. On July 1 of the current year. (b) X has 30. -Sec. 4. -Sec. her basis in the X stock was 10. then measure distributions out of Current E&P. -What if on July 1. X Corp. 312(a): anytime cash is distributed. -Entire distribution is a dividend out of current E&P. Distribution Order (Sec.000 in cash to Lisa with respect to her stock. thus has 0 current E&P (as a result 0 accumulated E&P). (NOT tested on this stuff above from problem 1). then accumulated E&P is irrelevant. Section 2 (1) Lisa has owned 100% of the stock of X Corporation for several years. then to Sec.65 expenses.000 of accumulated E&P and no current E&P. Accumulated Earnings and Profits 3. thus = 0 . must reduce Current E&P by 30k. and thus make adjustment. How will the distribution be treated in each of the following alternative scenarios? (a) X has no accumulated E&P and 30. 316(a) for dividend definition. 312(a): have to decrease Accumulated E&P by 30k. 316(a) says distribution is a dividend if out of accumulated or current E&P – always 1st from Current E&P. So.
So. . thus have Accumulated Deficit = 15k.000 of accumulated E&P and an E&P deficit of 30. -RA: 30k * (6/12) = 15k deficit incurred before July 1. 312(a) requires reduction to E&P. (i) X cannot determine how much of the deficit was incurred prior to the date of the distribution. The Regulations say that distribution is a dividend to the extent that Accumulated E&P exceed loss on date of distribution. -30k Acc.000 and 30. 301(c)(3). -Sec. thus equals 15k. then accumulated deficit is irrelevant. reduce that 15k by 30k deficit. -So. 316(a) says distribution is a dividend if out of current E&P and Regulations say that when current E&P is sufficient to pay distribution. 301(c)(2). 15k of 30k distribution is dividend. -Sec. all 30k is out of current E&P. Sec. 312(a) -the right result should be to reduce current E&P by 30k. -Rev. -Sec. -never decrease E&P below zero. -5k is excess. 316(a) says to 1st look at current E&P. (d) X has 30. (pro-rate means use 1/12 for each month). (c) X has an accumulated E&P deficit of 30. decrease Accumulated E&P by 15k. reduce Accumulated E&P of 30k by 15k.000 of current E&P. -AND the 1st 15k is dividend. -Sec. and is thus dividend. -not clear. and thus have 0 current E&P. Rul. so it is CG. -Meaning. but this seems to be the fair result. Meaning. -And. 74-164 says to pro-rate current deficit when don’t know when deficit was incurred. Meaning start next year with 30k accumulated deficit. -But what about other 15k? -10k is return of capital (basis). 301(c)(1). Sec.000 for the current year.66 Accumulated E&P. E&P – 15k loss – 15k distribution = 0.
000 of accumulated E&P and 20. -Reduce accumulated E&P to zero. E&P: 30k – 20k distribution = 10k acc. (2) Same facts as in (1) except Lisa sold her X stock to Mark for 50. -So.000 of positive E&P for the last 6 months. and thus is acc. -Only reduce Accumulated E&P if you end up with a current deficit. -Meaning. 312(a) -Current E&P: 10k – 10k distribution = 0. 20k of loss is allocated July 1. deficit next year. 312(a) -30k Acc. -Sec. (ii) X can establish that 2/3 of the deficit was incurred prior to the date of the distribution. E&P – loss allocated on date of distribution – Dividend Distr. but it has 40. Sec. 312(a): acc. thus. so that means the rest of the distribution (that is 20k) is out of Acc. X has 10.000 on October 1 of the current year and X distributed 10.316-2(b) Portion of Distribution out of Current Earnings and Profits -Amt of CEP = Distribution * (Current E&P / Total Distributions) -Look at current E&P first. How will the distributions to Lisa and Mark be treated? -Reg.000 in cash to Mark on December 31 of the current year. -So. -Sec. -Meaning. there is still a 30k Acc. (e) X has 30. and the remaining 10k accumulated deficit is what Corp. E&P.000 of accumulated E&P. X has an operating loss of 30. E&P – 20k Loss – 10k Distribution = 0. -And.000 of current E&P. -Acc. 10k from current E&P = 10k. as for the remaining 20k: -10k is basis and 10k is CG. so X ends up with 10. . E&P on July 1.000 for E&P purposes for the first 6 months of the current year. all 30k is a dividend. which is not enough to cover total distributions of 40k.67 -15k loss is leftover. 10k of Accumulated E&P is Dividend. E&P starting next year.000 of current E&P for the year. 1. has to start next year.
using Sec. -So.68 -So. her gain recognized is 45k = A/R: 50k – AB: 5k. -Answer: -Lisa’s 30k distribution: -15k is dividend out current E&P. Sec. distribution is deemed to come out of current E&P. -As a result. -May Corp. -5k return of capital (basis reduction). 31 distribution of 10k to Mark: 5k = 10k * (10k/40k). when Lisa sells stock on Oct. 1. -As a result. 1. not deductible. 22-24) Problem 2(a) -How much will be treated as a dividend? -30k is dividend b/c current E&P = 30k. reduce E&P by 30k. -5k is return of capital (basis reduction). -What about remaining 10k distribution? -that 10k is a return of capital (basis reduction). Dividend Distributions in General (p. -Corp’s Accumulated E&P for start of next year is zero (0).316-2. See Sec. E&P left. 316(a) stops us from having to trace funds. 312(a). meaning 5k of distribution is out of current E&P. deduct distribution? -NO. E&P by 10k. -New Stock Basis = 14k = (24k – 10k) -May Corp. So. -Now. borrowed money to pay distribution matter? -NO. 301(c)(2). -meaning use Ratio = Distribution * (Current E&P / Total Distributions) -As for the July 1 distribution of 30k to Lisa: 15k = 20k * (20k / 40k). -All 10k of Accumulated E&P is allocated to Lisa on the July 1 distribution. Problem 2(b) -How much of distribution is a dividend? . See Reg. -As result. we allocate the Current E&P among the distributions. Section 2. 312(a). meaning 15k of distribution is out of current E&P -As for Dec. and thus Accumulated E&P to start the next year = 0 (zero). reduce E&P? -Yes. what about Accumulated E&P: -accumulated E&P is allocated chronologically. b/c Sec. -remember this is tax-free. -Mark’s 10k distribution: -5k is dividend out of current E&P. Chapter 5. -Does fact that Corp. Instead. we decrease Acc. meaning we have 0 Acc. -10k is dividend out of Accumulated E&P. Mark’s new stock basis = 45k.
E&P. 31 -6k = 20k * (24k/80k) is dividend out of current E&P. -Recognized Gain = 38k on sale = A/R: 50k – AB: 12k. -meaning. -Current Loss = 32k -Acc. E&P. -Reg. E&P = 36k. meaning 24k – 15k = 9k. always pay out Current E&P. E&P = 0 = 36k – 28k to Ben – 8k to Ben and Molly. all 40k is dividend. -Ben’s new stock basis = 2k = 12k – 10k. to have Accumulated Deficit of 11k for start of next year. Problem 2(c) -Total Distributions = 80k. -so. Problem 2(d)(1) -Total Distributions = 80k. -As for distribution of 20k to Molly on Dec. -Molly’s stock basis = 40k = 50k – 10k. 4k is dividend out of Acc. -Current E&P = 24k -Acc. -As for distribution of 20k to Ben on Dec. 312(a) -Current E&P = 0 = 24k -Acc. -of the 8k Accumulated E&P. -What about Corp’s Accumulated E&P? -1st reduce Current E&P by 15k. -we only have Acc. -Corp’s starting Accumulated E&P for next year: -0 (zero) -Sec. -2nd offset Current E&P with Accumulated E&P. -Remember Ben sold ½ his stock to Molly on July 1.316-2(b) Portion of Distribution out of Current Earnings and Profits -Ratio = Distribution * (Current E&P / Total Distributions) -As for distribution of 40k to Ben on April 1: -12k = 40k * (24k / 80k) is dividend out of current E&P. -28k is dividend out of Accumulated E&P. and not Current E&P. so his basis in remaining shares = 12k. so how do we determine amount out of . 4k goes to Ben and 4k goes to Molly. Meaning offset current E&P of 9k with Accumulated Deficit of 20k. -so. -4k is dividend out of Acc. -10k is return of capital (basis reduction). -10k is return of capital (basis reduction). E&P = 36k. -Total E&P = 60k. 1.69 -all 15k is a dividend b/c 1st pay out of Current E&P even if there is a deficit of accumulated E&P. E&P. 31: -6k = 20k * (24k/80k) is dividend out of current E&P.
when Bill sells ½ stock to Molly on July 1: -Recognized Gain = 44k = A/R: 50k – AB: 6k (b/c ½ of 12k stock basis). -As for distribution of 20k to Molly on Dec. 301(c)(3). -What about Current E&P? -8k Deficit was allocated to 3/12 of year. -So.316-2(b). -As a result. -Corp’s starting Accumulated E&P for next year: -Accumulated E&P = 36k – 8k current year deficit – 28k distribution = 0. -Acc. -thus zero basis. E&P by amount which is loss allocated to that date. E&P. -So. -now Molly’s stock basis = 30k = 50k – 20k. -Bill’s new stock basis = 12k = 24k – 12k. 28k is dividend out of Acc. -Thus. 31: -we have no Acc. -So. all 20k is return of capital (basis reduction). -As for 20k to Ben on 12/31: -20k is capital gain. the entire 32k loss is taken into account on April 1. 24k is Accumulated Deficit going forward. -Ratio = Acc. -so. 31 -we have no Acc. -As for 40k distribution to Ben on 4/1: -4k is dividend out of Acc. -according to Reg. E&P. Then reduce Acc. E&P? -Allocate the Current Loss (Deficit) pro rata across the year. and 24k is allocated to 9/12 of year. 28k of Acc. -Meaning 1/12 of loss for each month. -12k is capital gain. -Remaining 14k is Capital Gain. E&P. . -then the remaining 12k is return of capital (basis reduction). E&P is left. E&P of 36k – 32k allocated loss = 4k. 1. E&P. Problem 2(d)(2) -Now there is no pro-rating the Current Deficit.70 Acc. E&P – ((# of months / 12) * Current Deficit) -As for distribution of 40k to Ben on April 1: -8k is loss b/c (3/12) * 32k = 8k. -As for distribution of 20k to Ben on Dec. -As for 20k to Molly on 12/31: -20k is return of capital. -NOTE: Ben recognizes 50k on sale = A/R: 50k – AB: 0. 6k is return of capital (basis reduction) -now Ben has zero stock basis. Sec. -Answer: 24k Accumulated Deficit. -Meaning. -24k is return of capital.
-600 shares have basis of 2k.300 is a dividend. -How do we allocate distributions? -Rev. -Answer: -Preferred Stock: 700k is dividend out of current E&P. 312(a) -Accumulated E&P = 36k – 32k allocated loss – 4k distribution to Ben = 0 -Answer: 0 (zero) accumulated E&P for start of next year b/c no loss is allocated to dates after April 1. pay preferred 1st out of current E&P and w/e is left goes to Common. -Corp’s Current E&P = 850k. -Return of Basis = (# of shares of Stock with Basis / Total # of Stock) * Excess (not dividend). -as a result. Problem 3 -10. How is the excess of 6.000 shares of Preferred Stock and 100.600 is return of capital. -as a result. So.71 -new stock basis = 30k. but how do we allocate it b/t different basis of stock? -See Johnson v. -Then Alice receives 9.400 capital gain.600 = 4. distributes 700k to Preferred Stock SH’s. but must pro rate excess b/t different basis for classes of stock. -Common Stock: 150k is dividend out of current E&P. basis of 2k is decreased to 0 b/c 2k is return of basis. -Corp. -new basis = 6. 69-440 says that preferred stock gets dividend before common stock. then distributes 250k to Common Stock SH’s. -300 shares have basis of 9k. E&P = 0. -and there is 2. United States -which says that SH can’t aggregate basis.600 = 2. The rest is return of capital or capital gain for SH.200 is attributed to Stock with Basis of 9k. Problem 4 -Alice owns 900 shares of common stock.900 distribution from Corp.800.000 shares of Common Stock.400 is attributed to Stock with Basis of 2k. . all 2200 is return of capital (basis reduction).600 treated? -6. -(600/900) * 6. and 3. -As for Corp’s Starting Accumulated E&P for start of next year: -Sec. -Answer: -(300/900) * 6. Rul. and Acc.
3. Tax Basis = 90k and E&P Basis = 98k. -meaning. 311(b)) Earnings and Profits -Sec. 311(b): Exception to general rule. 312(a)(3)/(b)(2)/(c): Corp’s downward adjustment to E&P. tax depreciation = 10k and E&P depreciation = 2k.liability assumption. thus use 98k (assume that Adjusted Basis on Exam is for Tax and E&P purposes). 1. 312(b) says to use Adjusted Basis for E&P purposes. -Sec.312-3. Section 3: Distributions of Dividend in Kind Corporation Rules: -Sec.301-1(g)(1) incorporates 357(d) rules for determining liability assumption (remember recourse is facts and circumstances to see if there is assumption. -for liabilities. -Appreciated Property Distribution: 1. this affects distribution of property and distribution to other SH’s. End of year 1. recognizes no gain or loss on distribution of property to SH (that is dividend in kind). so. remember don’t decrease E&P below zero (0). (History: General Utilities Doctrine: says distribution of property is not taxed. decrease by FMV of property (but if liability assumed. then decrease E&P by FMV . SH’s Rules: -Sec. this has been overruled by Sec. 1231. treat this recognized gain as E&P for dividends of all SH’s (do the ratio Recognized Gain * (Amount to SH / Total Distributions to all SH). 301(b): Amount of Distribution = FMV of property – Assumed Liabilities. 312(b)(1)/(f)(1): Corp’s 311(b) recognized gain increases Current E&P.312-3). 312(c).72 Chapter 5. (not below zero). -Character: Sec. -Flush Sentence of Sec. 1. -for appreciated property. must recognize gain on distribution of appreciated property (treat as constructive sale to SH). FMV less AB = Gain. -for depreciated property. -Sec. -Reg. Reg. 312(c) and Reg. Capital Gain. 2 decrease Current E&P by FMV of property less liabilities assumed by SH. decrease E&P by adjusted basis of property. see Sec. nd 2. 1245. -EX: 100k property. see Sec. Corp. and . 1st increase Current E&P by recognized gain. and 1239 (ordinary income). 1. 311(a): general rule is that Corp.
Sec. Sec. Pursuant to Sec. 50k – 100k = 0 Accumulated E&P.316-2 for amount to treat as dividend.73 non-recourse is subject to is enough). 301(d): Basis in property = FMV of property distributed. In-Class Examples Chapter 5. and excess of basis. 301(b). If Corp. -remember don’t decrease E&P below zero for distribution. has to pay taxes on the 50k. amounts that are dividend. uses cash method. -Sec. How will the distribution be treated in each of the following alternative scenarios? Appreciated Property (a) The FMV of the land is 100. then adjust E&P (meaning E&P = 35k). 1. -Earnings and Profits: -increase current E&P by Sec. -BUT Corp. his basis in the Y stock was 150. 301(c)(2)). Section 3 (1) Ned has owned 100% of the stock of Y Corporation for several years. Y has no taxable income and no E&P from its business operations during the current year. -Basis in Property: 100k. 311(b). has to pay 15k taxes. 316(a)) and 50k is return of basis (Sec. -New Holding Period for SH in distributed property. return of basis. then don’t adjust E&P. Y distributes a parcel of land to Ned.000. -Y Corp’s Tax Consequences: -Recognized Gain: 50k = A/R: 100k – AB: 50k. -Tax Treatment (Sec. As of January 1 of the current year. thus capital gain. uses accrual method. 301(d). -See Sec. On December 31 of the current year. Just showing adjustment for taxes.000. If Corp. -we do this before determining amount of dividend. 301(c): Tax treatment. Sec. -decrease current E&P for distribution of property to Ned. Paying at 30%.000. and its basis in Y’s hands is 50. Ned’s basis in stock now is 100k = (150k – 50k). -Sec. -As a result. 316 and Reg. Corp. we decrease E&P by the FMV of property (thus by 100k). Y is subject to tax at a flat rate of 30%. thus have 50k E&P. 311(b) gain. -Ned’s Tax Consequences: -Amount of Distribution: 100k. . 312. Y has no accumulated E&P. but don’t worry about it for this class. As a result. 301(c)): -50k is dividend b/c paid out of current E&P (Sec.
and its basis in Y’s hands is 125. (c). Depreciated Property (Loss Property) (c) The FMV of the land is 100. Sec. Sec. 311(b) gain. -Tax Treatment: all 30k is dividend out of current E&P. -Basis in Property: 100k.74 -new holding period. 1. Sec. -by permitting downward adjustment of AB of property. Sec. 312(a) allows for recognition of unrecognized loss. 301(b).000. -new holding period. -As a result. thus = 50k. 311(a) prevents recognition of loss. and Reg. Sec. 312(b). 301(c). Y has E&P of 200. 311(b). Accumulated E&P is 20k = 50k – 30k. -As a result. . -Y Corp’s Tax Consequences: -Recognized Gain: 50k = A/R: 100k – AB: 50k. -Downward Adjustment should = Net Distribution to SH. -Earnings and Profits: -increase current E&P by Sec. remember this is FMV less liabilities assumed (100k – 70k). Sec. Sec.000 from its business operations during the current year. -liability assumption is not factored into recognized gain. 312(b) -decrease E&P by 30k. Accumulated E&P is 75k = 200k – 125k.312-3. -Earnings and Profits: -Current E&P = 200k. and it is taken into account in one step. -Ned’s Tax Consequences: -Amount of Distribution: 100k. -Decrease E&P by the adjusted basis of the land. Sec. 301(b). Property with Debt (b) Same facts as in (a) except the land is subject to a recourse liability of 70.000. 301(d). (a).000. -Ned’s Tax Consequences: -Amount of Distribution: 30k = 100k – 70k. which Ned assumes. -Y Corp’s Tax Consequences: -Sec.
301(d). 312(a)/(b)(2). -new holding period. -increase current E&P by Sec. 301(d). 311(b) gain of 90k. Sec. -As a result. -new holding period. -Basis in Land: 60k. -new holding period. -Tax Treatment: 25k is dividend b/c of 25k accumulated E&P. 301(b)(1). -no adjustment to E&P. Rest is either return of capital or capital gain. Sec. -Tax Treatment: 115k is dividend b/c 90k out of current E&P and 25k out of Accumulated E&P. -Basis in Land: 150k. -Basis in land: 100k. 24-26) Problems 1-5 Problem 1(a) -Corp’s Tax Consequences: -no gain or loss recognized. Sec. Meaning. -Casey’s Tax Consequences: -Amount of Distribution: 150k. but remember 1239 can come into play. -remember distributions can’t decrease E&P below zero.75 -Tax Treatment: all 100k is dividend out of Current E&P. Sec. 25k – 60k = 0 (can’t go below zero). Sec. Sec. 311(b). Problem 2(a) -Corp’s Tax Consequences: -Recognized Gain: 100k = A/R: 190k – AB: 90k. 301(b)(1). 312(b). 301(d). -decrease E&P by 150k. the unrecognized loss is eliminated forever. -Accumulated E&P: 0 (zero) b/c of 60k distribution (the 60k AB is amount to decrease E&P by). -probably 1231 gain. Accumulated E&P = 0. Sec. Chapter 5. Sec. Then the rest (35k) is either return of capital or capital gain. Section 3 Problems (p. . -Casey’s Tax Consequences: -Amount of Distribution: 60k. Problem 1(b) -Corp’s Tax Consequences: -recognized gain: 90k = A/R: 150k – AB: 60k.
311(b). subject to is enough. Accumulated E&P = 0 (zero) for start of next year. 1. -this is assuming Ricardo did not assume recourse liability – we have to look at facts and circumstances to determine if Ricardo assumed recourse liability. we have 50k Accumulated E&P starting next year. 357(d) rules are not incorporated here like they are in Sec. 301(b). Sec. -Ricardo’s Tax Consequences: -Amount of Distribution: 190k. -as a result. Sec. meaning 100k FMV less 50k liability assumption. -decrease E&P by 190k(?) distribution. 312(b)(1). Reg.312-3 say that SH taking property subject to liability means that you’d take reduction of liability. 357(d) and there is no express assumption of non-recourse debt required. 312(a)(3)/(b)(2) as adjusted by 312(c). We don’t have enough facts in this problem. no change). Adjust for liability assumption. -new holding period. 301(b)(2). 312(b)(1). -BUT there is argument that you do make liability adjustment. 311(b) gain. -decrease E&P by 50k. Sec. (thus. 357(d) rules here.312-3 for liability assumption. -Return of Capital/Capital Gain: 90k. Problem 2(b)(1) -same answer as Problem 2(a) b/c we use the rules in Sec. -Tax Treatment: -Dividend Portion: 100k out of current E&P . 312(c) and Reg. Sec. -there is no express guidance on how to adjust E&P. -Basis in Land: 190k. Problem 2(c) -Corp’s Tax Consequences: -Recognized Gain: 100k = A/R: 190k – AB: 90k. -Earnings and Profits: -increase E&P by 100k Sec. Sec. 301. Sec. . Sec. but it makes sense to apply Sec. 1. 316. -as a result. 301(c)(1). Sec. Sec. Sec. 301(d). -Ricardo’s Tax Consequences: -Amount of SH’s Distribution: 50k. 301(d). Sec. -Sec. 190k – 140k liability assumed. 311(b) gain. -Tax Treatment: -Dividend Portion: 50k out of current E&P. -SH’s Basis in Land: 190k. 312(a)(3)/(b)(2). 301(c)(1). Sec.76 -Earnings and Profits: -increase E&P by 100k Sec. Sec.
Actual Sale by Corp. can’t recognize this loss.312-7. -Sec. Accumulated E&P for next year is 10k = 140k – 130k. 267 applies. 267(a)(1) and (b). -Remember there is no distribution. 267(a) did not apply. Sec. sold land to Yuan (sole SH) for 100k? -Corp. which disallows Corp. -Basis in Land: 100k. to SH Problem 3(b) -What if Corp. -So. Reg. Sec. Sec. we reduce current E&P by 30k. we make an adjustment for the loss disallowed for tax purposes. 301(b)(1). Sec. So. may recognize loss of 30k = A/R: 100k – AB: 130k. -So. -then Sec. 301(d). 301(d). so Sec. See Sec. 311(a) says Corp. -What is the adjustment to E&P? -yes. 301(c)(1). . from deducting the 30k loss. -Sec. -Dividend Portion: 100k out of accumulated E&P. Remember don’t adjust twice (just once using AB of property). –remember to use AB from Sec.77 Problem 3(a)(1) -Realized Loss: (30k) = A/R: 100k – AB: 130k. 312(f). Sec. there is no dividend in this problem. 312(a)(3) says to decrease E&P by adjusted basis of property (when it is depreciated property). 1012 Cost Basis. See Sec. BUT . . 267 when Sec. 267 applies b/c Corp. Problem 3(a)(2) -Amount of Distribution: 100k. -Basis in Property: 100k. and don’t think Sec. Earnings and Profits -0 Current E&P b/c no adjustment when distributing depreciated property. . and Yuan are related parties b/c Yuan owns more than 50% of Corp’s stock. -Q: What if Yuan later sells property for 180k? How much gain? -80k recognized gain = A/R: 180k – AB: 100k. 1. Sec. 165 allows. 301 does not apply. FMV. -decrease E&P by 130k.
267. Sec. -1st is Sec. Yuan sells the land for 180k? How much gain? -50k b/c Sec. -decrease Acc.4 mil FMV (Bldng). -But it looks like Congress could have relied on Sec. 311(b). but chose not to do that and instead have blanket ban on loss. Sec. -Building: 1.8 million out of Accumulated E&P.6 mil = 0. -Next. Tax? -NO they are not consistent with property distribution. we have 80k realized gain = A/R: 180k – AB: 100k. 1. FMV (Land) + 1.6 million = A/R: 2mil.6 million.4 mil. -decrease current E&P by 1. distributing 2 Assets to SH Problem 4(b) -Corp’s Tax Consequences: -Recognized Gain: 1. he gets no benefit of previously disallowed loss. -Dividend Portion: all 3. -Martha’s Tax Consequences: -Amount of Distribution: 3. making recognized gain = 50k. 267(d) gives Yuan benefit of previously disallowed loss of 30k. 301(d).4 mil. -Related Party situation heightens manipulation of tax code. current E&P deficit = 30k. -Q: What policy reason might there be for the answer being different than in Problem 1(a)? Sec. Corp. Acc. from recognizing loss on distribution of building. -as a result. 267(d) says gain shall be recognized only to the extent it exceeds the previously disallowed loss.6 million = 10 mil – 3. = 6. instead only get benefit of previously disallowed loss if sell property at gain. E&P for next year is 110k = 140k – 30k. -decrease E&P by 2 million (land) and 3 million (building) = 5 million downward adjustment. 311(a) disallows Corp. That is policy reason for Sec. E&P is 6.78 -as a result. 267. – AB: 400k.6 million starting next year.4 million = 2 mil. -Earnings and Profits: -increase Current E&P by 1. 267(d) to allow SH to take advantage of previously disallowed loss under Sec. 311(a) v.4 million dividend. -Basis: -Land: 2 million. -So. 311(a). E&P by 3.6 million out of current E&P and 1. 267 consistent with the 2 tier tax consequences of Corp. -Sec. but Sec. -Acc. Sec. .4 million. -Remember if Yuan sells for loss.
which equals 30k out of current E&P. **Remember to start with Corp’s Tax Consequences b/c Corp’s Recognized Gain increases Current E&P. -gain recognized: 90k. 311(b). Sec. 1. and that leave 5k left to H. 70k distribution * (90k current E&P/210k total distribution). -Dividend Portion: -use ratio from Reg. -what about out of Acc. there is 0 (zero) Acc.316-2. Dividend Portion: -use ratio from Reg. E&P? -gets 5k. which affects all distributions to all SH’s throughout current taxable year. -as a result.316-2. which equals 60k out of current E&P. E&P? -40k goes to O. E&P) is dividend and rest (75k) is return of basis/capital gain. 1. -Answer: all 70k is dividend. -Earnings and Profits: -increase Current E&P by 90k. -Hamlet’s Tax Consequences: -Amount of Distribution: 140k. 140k distribution * (90k current E&P/210k total distribution). -Then decrease E&P by 140k + 70k. -what about out of Acc. -Ophelia’s Tax Consequences: -Amount of Distribution: 70k. -Answer: 65k (60k out of current E&P and 5k out of Acc.79 Problem 5 -Corp’s Tax Consequences: -none for cash distribution. E&P starting next year.** .
Excessive Rent paid by Corp. Corp’s Tax (35%) 35k 0 Distribution Amount 65k 100k (compensation amount) SH’s Tax 9.301-1(j). System. Reg. and to ensure double taxation of the Corp. Bargain Sale to SH. 3. Corporate expenditures primary for SH’s Benefit (with no expectation in return). -What factors stand out? -fact that VP makes more than President. Reg.162-7. so ask why? You’d look at duties of VP compared to duties of President.000 Chapter 5. and 600k is distribution (thus not deductible by Corp. 7. 5. Excessive Compensation. has profits of 3 million after salaries.) -the 600k is dividend only if E&P is sufficient to cover it. -8 2. 162 deductible. 6. -we do this b/c dividends are not deductible by Corp. S is President and owns 40% and has salary of 800k. Corp. -remember a dividend is a distribution to SH in SH’s capacity. . earn as compensation.750 (15%) 35k (35%) After-Tax SH amount 55. unless it is excessive. Section 4: Disguised Dividends -Disguised (or Constructive Distributions: 1. Excessive rent paid to relative of SH. -this is the incentive to disguise dividend as compensation: Dividend Compensation Corp’s TI 100k 0 = 100k GI – 162 100k ded.301-1(m). and look at what VP and President in similar position at similar corp. “Loan” with no real obligation to repay. payment of compensation to SH-ee is not a dividend. Rent-free use of corporate property by SH primary for personal purposes. 1. 8.250 65. Cancellation of SH’s loan to Corp. Reg.2 million. -Facts: W is VP and owns 60% and has salary of 1. 1. -What if similar VP makes 600k? -then 600k is Sec.80 Chapter 5. Section 4 Problems (p. 1. 26-28) Problem 1 and 4 Problem 1(a) 1-Excessive Compensation to SH-EE? -See Factors on page 228. -generally. 4.
162-7(b)(2))? -contingent compensation is usually looked whether the agreement is reasonable at time of it being entered into. which equals 40%. then look at facts and circumstances. -Req. S and W each get a bonus of 800k and 1 million respectively. Problem 1(b) -SH-EE’s are still paid in proportion to stock ownership. -S owns 40% and is receiving 800k of 2 million. Problem 1(c)(A) -what if W is paid 1 million and S is paid 800k as compensation. -there is a case (PSA) that said compensation was partly from services provided by non-SH employees. (closely held Corp. so this raises a concern as to whether this compensation is reasonable. -this is probably not a reasonable rate of return. -so. -What about contingent compensation (Reg. but there is just 30k profits retained after salary? -some courts use the hypothetical investor test. has 4 million of profits after paying salary and bonuses? Do bonuses raise an issue? -we don’t have proportionate payments. but do SH-EE who own all Corp.81 -remember disguised distribution is treated same under 301 if facts and circumstances so illustrate. which equals 60%. -a bonus is used to get employee to do his best.162-7/8 says that if salary is not reasonable. it was not being paid for SHEE’s services. even if later the amount is “unreasonable.5% = 30k profits retained / 20 million net assets. 1. so even though compensation was reasonable. Compensation amount is reasonable. -W owns 60% and is receiving 1. 1. Some Courts look at bonuses to SH-EE who are majority SH’s (+50% . how much of compensation being paid is actually for W and S’s services? Problem 1(c)(A) -Bonuses? -Now.2 million of 2 million. and ask whether a hypothetical investor would be satisfied with profits left after salary.probably even more) as suspicious. . compensation is solely for services provided by SH-EE.” Ask if the agreement was entered into at arm’s length. we have sufficient retained profits so Hypothetical Investor would probably invest. and Corp. -Reg. AND 2. for Compensation: 1.) need incentive to do their best. -would investor invest in this Corp? -the rate of return is 1. -fact that salaries are in proportion to stock ownership.
(there is no automatic dividend/distribution rule). 1. does Corp. -Fair Rental Value is standard to use for valuing distribution. and Corp. reasonably expect to be repaid by SH and intend to enforce loan? -if no. then treat loan as a 301 disguised distribution.301-1(j)) -a sale of property to a SH at price below FMV results in the bargain element being taxed as a constructive 301 distribution. Problem 4 -Reg. 2-Excessive Rent -SH leases property to Corp. to SH. 1. 4-Cancellation of SH Loan to Corp. is a constructive 301 distribution b/c of Reg. then gift from SH to Relative. pays excessive rent (more than Fair Rental Value). -keep in mind that dividend paying history of Corp. has history of paying dividend. If Corp. has paid no dividend in past does not mean bonus is automatically a dividend. . rent free house for SH’s personal purpose. -another example is SH paying less than Fair Rental Value to lease property from Corp. then Corp.3011(m). then Court will probably look at bonus as compensation. Thus. 5-Corporate Expenditures primarily fbo SH and Rent Free Use of Corporate Property -examples include providing transportation to SH for SH’s personal use (not corporate purpose). -Ultimate Question is: who is primary benefit? Corporate or SH? -if SH contributes property with debt to Corp. to SH at beginning w/ expectation of SH to pay. (Reg. 3-Corp. but use was primarily for SH’s personal purposes.301-1(j) says that FMV over Bargain Price = Constructive 301 Distribution. assumes debt but SH remains liable for debt. paying off assumed debt is NOT a disguised distribution. so this was a 301 distribution. -Ireland Case: SH-EE used corporate jets. payment of SH’s personal expenses or payment of SH’s personal debt. and Corp. -so. the COD income is constructive 301 distribution. -but the fact Corp. has history of paying dividends. Loan to SH -this is where the SH has no real obligation to pay off Corp’s loan. 7-Bargain Sale to SH (Reg. is relevant factor. 1. ask at time of loan being paid. The value is determined using Fair Rental Value. not corporate purposes. that amount in excess is probably a disguised dividend. 6-Excessive Rent paid to Relative of SH -this is deeming the transaction as a 301 distribution from Corp.301-1(m)) -this is a true loan from Corp. 1.82 -another factor is whether Corp. then cancellation of debt (COD) by Corp. -this is for Rent Free use of Corporate Property by SH.
-then Sec. this 2 million is a dividend b/c sufficient E&P. recognizing gain. -What is basis in property? -Basis: 3 million b/c 1 million is 1012 Cost Basis and 2 million is distribution. meaning amount of distribution = 2 million. when property is sold at 3 million. -A/R: 2 million – AB: 600k (portion of basis allocable to distribution) = 1. Sale Amount . -then use Sec. 311(b) applies.4 million recognized gain. Outrun’s Basis in property = 900k. what if for problem 4. Outrun having Basis in Property Now. -Meaning. 1. 301 Distribution Amount 2. so it is 301(d) FMV basis. showing that you have to bifurcate bargain sale transactions to SH for Corp. -Total: 2.1 million recognized gain. 1001(c) for sale portion: -A/R: 1 million – AB: 300k = 700k recognized gain. -As a result. there is no gain = A/R: 3m – AB: 3m. -basically. for problem 3 million FMV – 1 million paid = 2 million 301 Distribtuion.83 -So.
which owns 100% of the stock in Subsidiary Corporation (“S”).000 in cash to P. Corporation owns 80% or more of Corporation paying dividend. (b). 246. (a) What are the tax consequences to P if S has E&P in excess of 10. Section 5 (1) Olivia owns 100% of the stock in Parent Corporation (“P”). The Sec. During the current year. Sec. 1504(a). Sec. 1059. 1504(a). 3-Deduction is 100% if Qualifying Dividend. Sec. 243 Dividends Received by Corporate SH Deduction 1-General Deduction is 70% of Dividend Amount. S distributed 10. 2-Deduction is 80% if Corporation owns at least 20% of Corporation paying dividend. 301. Section 5: Intercorporate Dividends -Sec. 243 that affects this in that it allows for a Dividends Received Deduction for the Corporate SH who receives the dividend. Sec. DRD = 8k b/c 100% Qualifying Dividend. In-Class Example Chapter 5. 243(a)(1). See Sec. What if S has E&P of only 8. 243 DRD is computed only on the dividend.000? -first earnings are taxed at Subsidiary level. 243(c). AND. -Affiliated Group.000? -The amount of dividend is only 8k. -BUT . . P has owned the S stock ever since S was formed five years ago. Sec. . Sec. Sec. -this leaves 6500 to be distributed to Olivia. 2. (b) . there is Sec. 243. -Answer: GI 10k – DRD 10k = 0 net income.500 b/c tax rate is 35%. -And. P is subject to tax at the highest marginal rate (35%).84 Chapter 5. The corporations have never elected to file a consolidated tax return. -the excess 2k may be deemed return of capital. then are taxed at Parent level when distributed as dividends. So. this scenario satisfies Qualifying Dividend in that P owns 100% of S and E&P were earned while P owned S. Sec. 243 DRD deduction is 100% of 10k = 10k. Sec. -Tax on Dividend of 10k to Parent is 3. -Qualifying Dividend means: 1. -So. 243(a)(3). -this is for affiliated group that does not file consolidated tax return. dividend is paid out of E&P during Corporation’s ownership of 80%.
1. *Ex-Dividend Date: usually 3 business days before Record Date. buys stock on 3/15 for 30k. Date then sells stock below value for loss deduction. There is tax savings of 700. 246(c)(3) Holding Period starts on date after purchase date and includes date of disposition (sale). 246(c) Holding Period Requirement a. -note we have a net taxable loss of 1400. -Corp. Sec. d. Problem 2(a) Timeline: 3/15 -----------------------------. Dividend Dates: i. This is to ensure owner on Ex-Dividend Date is same owner as owner on Record Date. 243 DRD 1. gets 70% DRD. Purpose of Holding Period is to disallow Sec. buyer must buy before Ex-Dividend Date. To qualify for Sec. Declaration Date ii. -A/R 28k – AB 30k = 2k STCL. 243 DRD. . Whoever buys stock on Ex-Dividend Date does not acquire stock having right to dividend. -Application of Sec. SH buys stock before Ex-Div. 243 DRD when Corp. meaning 2k * 70% = 1400 DRD. -assume no qualifying dividend and assume no 20% ownership.3/17 ------------------------. So. Record Date: these are SH’s who are to receive dividend. -so. -GI 2k – DRD 1400 = 600 Net Taxable Income * 35% tax = 210 tax. Holding Period looks at 91 day period that begins 45 days before Ex-Div Date and ends 45 days after Ex-Div Date. to buy stock with right to dividend. -Corp. sells stock for 28k on 4/15.4/1 Declaration Date Ex-Div Date Record Date Payment Date -Corp. 243: -Corp.85 Rules Preventing Abuse of Sec. a Corp. i. -Sale of Stock for 28k. SH must hold stock for 46 days of specified period (which is 91 days). b. Payment Date c. iv.3/20 -------------------------. Sec. 2. iii. receives 2k dividend on 3/20. net tax savings of 490.
ii. ii. Problem 2(b) -Holding Period looks at 91 day period that begins 45 days before Ex-Div Date and ends 45 days after Ex-Div Date. 1059 does not apply b/c 2k / 30k = 6% which is less than 10%. 246(c) problems hold stock 46 days after Ex-Div Date if buy stock day before Ex-Div Date. 1059 if satisfy Sec. -in problem this period runs from 1/31 to 5/1. this % is determined by comparing dividend to Corp’s stock basis (dividend / Stock Basis). 1059 Extraordinary Dividend a. which equals DRD. the basis in such stock is reduced by the non-taxed portion. 243(c)(3). Exceptions: i. -So. has to reduce Stock Basis by non-taxed portion of dividend. i. 1059(d)(6). -Holding Period during these 91 days is 47 days. This equals DRD. Sec. Sec. Non-Taxed Portion = Dividend – Taxable Portion (which is Dividend – DRD). Problem 2(b) -Sec. See Sec. -DRD = 2800 b/c 4k * 70%. e. 246(c). 1059(e)(2). see Sec. -What if Dividend is 4k instead? -Sec. Sec. c. If Corp. Amounts in excess of basis are treated as gain. d. b. Aggregation of Dividends. .86 -This is abuse Congress wanted to prevent in Sec. Sec. *Only go to Sec. -Result: 30k – 2800 = 27. 1. 1059 does not apply if Corp. 1059 does apply and we do have Extraordinary Dividend b/c 4k / 30k = more than 10%. 1059 does not apply to qualifying dividend (the 100% DRD). -So. now we have GI of 2k – 0 DRD = 2k net taxable income * 35% = 700 tax. -So. gets full 243 DRD. Extraordinary Dividend defined: i. This is the 80% or more owned subsidiary. 1.200 Stock Basis. 246(c): -Corp. 2. -Holding Period is 21 days (3/16 to 4/5). Corp. held stock for entire period Corporation paying dividend is in existence. Corp. -As a result. 1059(c)(3). has not held for more than 2 years before declaration date. Preferred Stock: threshold percentage is 5%. receives an extraordinary dividend with respect to stock Corp. gets no 243 DRD b/c did not satisfy Holding Period req’t. 246(c) Holding Reqt. Common Stock: threshold percentage is 10%. -Application of Sec. to not run into Sec.
can use 42k FMV instead of 30k Stock Basis to avoid Extraordinary Dividend problems (the 10% problem).200 = 1. must hold stock 2 years before Declaration Date. Sec. -NOTE: Net Taxable Income = 1. so the answer is the same. what happens if Corp.200 = 1. as a result. buys stock on 1/15.200 Stock Basis. treat each 2k dividend as extraordinary dividend and do basis reduction. treat each as own dividend. not clear b/c do not treat as 1 dividend. -NOTE: Net Taxable Income = 1. 1059(c)(4) Election to use FMV of Stock -What if Corp. -Sec. what happens if Corp. then on 3/16 Stock is worth 42k? -Now. Corp.200 capital loss. the combined amount of dividends exceeds 20% of Corp SH’s AB in stock. Corp. pays to Corp. 1059 does apply and we do have Extraordinary Dividend b/c 4k / 30k = more than 10%. -So. -DRD = 2800 b/c 4k * 70%. Aggregation of Dividends -What if over a 1 year period (365 days). 1059(c)(4) Election. sells stock for 26k? -A/R 26k – AB 27. has to reduce Stock Basis by non-taxed portion of dividend. Problem 2(c) -Sec. -So. -Now. SH five dividends of 2k each with more than 85 days between each Ex-Div Date? (assume stock basis = 30k). 1059(c)(3)(B) says to aggregate dividends and treat each dividend as an extraordinary dividend if within 1 year (365 days). 365 day period: may count dividend in more than 1 365 day period. . Result: -Sec. waited to sell stock in Year 3? -That is irrelevant b/c Corp.87 -Now. 1059(c)(3)(A) Aggregation of Dividends -if Ex-Div dates are within 85 days of each other. then combine both dividends as one to determine if extraordinary dividend.200 capital loss. -What if Corp. -10k / 30k = 33%.200 b/c 4k – 2800 DRD = 1200. sells stock for 26k? -A/R 26k – AB 27.200 b/c 4k – 2800 DRD = 1200. -Result: 30k – 2800 = 27. -Sec. which equals DRD. Corp.
meaning can pay all to SH who got distribution 1st from Corp. E&P does not affect Current E&P for distributions. does not affect computation of 311(b) gain. -deficit in Acc. DRD is only calculated on portion that is dividend. meaning to be dividend it must be paid out of E&P or Acc. and SH call distribution something other than dividend trying to avoid double taxation. -a distribution is always deemed to 1st be paid from E&P. On exam. so no overlapping 85 day. Disguised Dividend -Reg. -when SH assumes liability that assumption of liability reduces amount of 301 distribution to the SH. -remember Sec.301-1(c) confirms that 301 applies only if the amount paid to SH is paid to SH in SH’s capacity. 311 applies asset-by-asset. Question: Is Corp. . -Current year deficit can reduce amount of Accumulated E&P. -multiple blocks of stock = stock groups with different basis or holding period. -a liability attached to property distributed by Corp. not on return of basis or gain portion. -Dividend is paid out of E&P. -SH rec’ing property. Summary of Chapter 5 -keep in mind 302 redemption distributions trumps 301 distributions. -Start with Corp’s tax consequences before doing E&P b/c of increase in E&P by 311(b) gain. SH still under E&P rules. -BUT 301 can apply even when Corp. we will be told the Ex-Dividend date.88 85 day period: treat as one dividend. E&P? YES. 1. -Accumulated E&P is allocated chronologically. gets FMV basis and new Holding Period.
1. meaning recognize gain on distribution of property but not loss.302-2(c). Section 1 (1) X Corporation has 100 shares of common stock outstanding. Non-Corporate SH prefers Sec.89 Chapter 6: Stock Redemptions Section 1: Introduction -Corporation still uses Sec. 302(d) says to use Sec. so have a 750 tax. -Sec. SH can use Installment Method for 302 Exchange treatment. X has E&P of 100. Sec. If X redeems 10 shares from Paul for 15. Meaning. how much income or gain will Paul have if § 302(a) applies? What if § 302(a) does not apply? Which would Paul prefer? What if Paul were a corporation taxed at the highest marginal rate (35%)? -if Sec. -no basis recovery. which is taxed at 15%. Even when basis = 0.000. 15k is treated as a dividend. -SH uses Sec. 301 (could be dividend). and the shares have a FMV of 1. 1001 to determine AR – AB for amount of gain). -meaning. if no test is satisfied. -if Sec. 302(a) which says 302 applies if a test in 302(b) is satisfied. 301 for distribution treatment. Reg. SH prefers 302 Exchange treatment b/c can offset LTCG with LTCL. Paul’s basis in his X shares is 1. In-Class Examples Chapter 6. 302(a) applies: -this is Sale / Exchange Treatment. 302(a) is known as Exchange Treatment. -What if this SH is a Corporation? -Sec. then redemption distribution is treated as payment for the redeemed shares (so use Sec. 302(a) Exchange Treatment: . 302 redemption over Sec.250. 301 dividend. -AR: 15k – AB in Redeemed Stock: 10k = 5k LTCG taxed at 15%. -So. 302(a) applies. -If Sec. thus tax of 2. Paul owns 30 shares.500 per share. so basis of redeemed shares is shifted to other shares.000 per share. Paul has held his shares ever since X was formed five years ago. 311 to determine tax consequences.000 in cash. Paul still has a basis in his shares of 30k. 302(a) does not apply: -Sec. 302(d) says treat distribution as Sec. -also.
preference for Corporate SH is Sec. -Dividend = 15k and DRD is 12k. Sec. Rob has no interest left in Corp. 1059(e)(1)(A): 20k AB in Non-redeemed shares.000 per share. (a) On December 31 of the current year. So. RS redeems all of Rob’s shares for 100.050 tax. -So.000 in cash. 1. Reg. so Net Taxable Income = 3k. 312(n)(7) limits the downward adjustment under Sec. The FMV of the stock is 1. Rob and Sara (unrelated parties) each own 100 shares. What are the tax consequences to Rob? What is RS’s accumulated E&P as of January 1 of next year? (i) RS has accumulated E&P of 50. this transaction should be treated as exchange. 18k stock basis.750 tax. -A/R: 100k – AB: 25k = 75k Capital Gain.90 -A/R: 15k – AB: 10k = 5k * 35% tax rate = 1.302-2(c) 30k (12k) Non-taxed portion Sec. 302(a) does not apply: -302(d) says this is 301 distribution. -Sec.000. -BUT Sec.1059(e)-1. -Corp’s Accumulated E&P: -Sec. -thus. (e)(1)(A). 1. 1059(e)(1)(A) says to treat redemption as Extraordinary Dividend whenever it is not redemption pro rata to all SH’s (meaning just redemption of one SH). 1059(a). 301 applies. -Rob’s Tax Consequences: -all of Rob’s interest is being redeemed. 302(a) applies. -Sec. taxed at 35% = 1. 301 so wants 302(d) to apply. + 10k AB in redeemed shares.000 and current E&P of 50. existence or qualifying dividends. Rob and Sara both have a basis of 250 in each of their shares. 1059(e)(1)(A) does not apply to stock held for entire corp. -Stock Basis Reduction b/c of Sec. 312(a) to the ratable share of accumulated E&P attributable to redeemed shares. but then Sec. so it should be treated as redemption under all 302(b) tests. 312(a) says to decrease E&P. the 312(n)(7) limitation is applied based on the accumulated E&P available on date of 302 redemption. The ratable share of accumulated E&P . for 100k. Reg. meaning Rob is treated as selling stock to Corp. Behind the 302(b) Tests: (2) RS Corporation has 200 shares of common stock outstanding. Basis in redeemed shares is shifted over to non-redeemed shares when Sec.
500 basis from redeemed shares being shifted to 12. -Acc.. 302(d) which says to use Sec. (ii) RS has accumulated E&P of 250. -Applying Sec. -New stock basis for each SH: 0 (zero).000. RS redeems 50 shares from Rob for 50. So. so it’s not wiped out. E&P: 50k – 50k – 50k = 0. -Basis shifting. E&P. totaling 25k basis for stock. E&P * (# of shares redeemed / total # of shares outstanding immediately prior to redemption). so go to Sec. result is really the same as a 301 distribution. Not a 302 Redemption (b) On December 31 of the current year.91 attributable to redeemed shares = Acc. -Sec. -the redemption is not changing ownership of SH’s b/c each still owns 50% of Corp. 312(n)(7) only applies when it’s a 302(a) redemption. this 50k is downward adjustment to Acc. 312(n)(7): 300k * (100k/200k) = 150k. that’s 12. . 301 when 302(a) is inapplicable. -Entire 50k distribution to each SH is a dividend. What are the tax consequences to Rob and Sara? What is RS’s accumulated E&P as of January 1 of next year? (i) RS has no accumulated E&P and current E&P of 100. -Corp’s Acc. Acc.000 in cash and 50 shares from Sara for 50. E&P: 100k – 50k – 50k = 0. 301(c)(2). so we limit it at 100k downward adjustment to Acc. E&P for start of next year = 200k. so each SH still has 25k basis for stock owned. E&P * (100k/200k) = 50k.000. -Stock Basis for SH’s: -Sec.000. -Acc. -We allocate Current E&P to SH’s pro rata. So. E&P is limited to 302 Redemption Amt. See 301(c)(1) and 316. Downward Adjustment to Acc.500 basis of non-redeemed shares. 301(c)(1) and 316. -The basis for each SH is shifted. -This kind of redemption does not satisfy 302(b) tests. E&P. (ii) RS has no accumulated E&P and current E&P of 50. -So.000 in cash. -RA to problem 2(a)(i): 100k Acc. but this is more than 100k 302 redemption. -Result: remaining 25k of 301 distribution for each SH is treated as return of capital. E&P for start of next year = 50k. Sec. Sec.000 and current E&P of 50. 302(c)(2) should apply to total stock basis after shifting basis from redeemed shares. meaning each SH is treated as receiving 25k dividend income.
On December 31 of the current year. meaning 20k is dividend out of current E&P. E&P. 301 and Sec. there is 30k excess current E&P. see above. -And the 25k Acc. How much of Sara’s distribution is a dividend? What is RS’s accumulated E&P as of January 1 of next year? (i) RS has accumulated E&P of 50. E&P: -we pro-rate amount of Current E&P attributable to Rob’s May 1 redemption. 316. -New stock basis is 20k = 25k – 5k.000 and current E&P of 80. -Rob’s Tax Consequences: -all 100k is redemption. so first apply to Rob’s 302 redemption. -Sara’s Tax Consequences: -all 50k is dividend out of current E&P. RS redeems all of Rob’s shares for 100. -50k * (100k/200k) = 25k. RS makes a § 301 distribution of 50. E&P remaining is allocated to Sara. -Rob’s Tax Consequences: -all of Rob’s interest is redeemed. (n)(7) downward adjustment to Acc. -Now. -So. Sec.000. all 20k Current E&P is allocated to Sara. -Downward Adjustment to Acc.000 and current E&P of 20. . 302 redemptions. 302(a) applies. meaning 25k is dividend out of Acc. 301 distributions. E&P remaining. -this excess 30k Current E&P is taken into account for the 302 distribution. so Sec. -A/R: 100k – AB: 25k = 75k Capital Gain. -the remaining 5k is return of capital. affects 312(a).000 in cash. E&P. E&P: -Acc. 301(c)(1). -Sec. E&P are allocated in chronological order to 301 and 302. Meaning. (ii) RS has accumulated E&P of 50. 312(n)(7) limits 312(a)(1) downward adjustment. only the excess is attributable to Sec.000. -Downward Adjustment for Acc. -Sara’s Tax Consequences: -Current E&P are first allocated to Sec. 302 interplay (c) On May 1 of the current year.000 in cash to Sara. 302(c)(2).92 Sec. -Result: 50k – 25k = 25k Acc.
500 = 142. -S’s Tax Consequences: -Sec. -Answer: 180k – 45k = 135k Acc. then use 180k for Sec. -S will realize a 10k taxable loss = A/R: 150k – AB: 160k. 312(a)(3). 312(n)(7) limitation to Sec. -Now.93 -meaning. E&P for start of next year. (b)(2) for normal 301 distribution of appreciated property (which is 150k downward adjustment). -is this 10k loss deductible? Yes.* Problem 1(a)(2) -same result for Corporation. -then add 10k current E&P to 50k Acc.000 downward adjustment. E&P = 60k – 30k = 30k + Current E&P of 20k remaining = 50k Acc. -120k Acc. See Sec. -IF attribute 311(b) gain to 302 redemption. -Downward Adjustment to Acc. then add excess current E&P of 60k from 311(b) gain. -Acc. -this 10k loss is recognized b/c there is no loss non-recognition rule. so that’s (100k/200k) * 60k = 30k downward adjustment to Acc.500 Acc. .500 downward adjustment. Sec. *Remember to add in Current E&P not attributable to 302 redemption to Acc. already had 120k Acc. E&P for next year. E&P for 150k 302 redemption. E&P. E&P + 30k Current E&P attributable to 302 Redemption (this is pro-rating the Current E&P) = 150k * (25%) = 37. -S’s basis in Land: 150k. E&P. E&P = 60k. 312(a) b/c this is a Sec. 180k * 25% = 45. -BUT Downward Adjustment using Sec. that results in 180k Acc. E&P for next year. -70k LTCG = A/R: 150k – AB: 80k. apply Sec. to 60k. -this 60k increases current E&P of Corp.* Chapter 6. Section 1 (page 30) Problem 1(a)(1) -Corp’s Tax Consequences on 302 Redemption: -Sec. *there is no guidance on which method is correct. -Answer: 180k – 37. 267 does not apply b/c S does not own more than 50% of stock. Sec. 312(n) (7) downward adjustment. 302 redemption. 311(b) gain is 60k = A/R: 150k – AB: 90k. 312(n)(7). 1012 cost basis b/c 302 says exchange is treated as payment for stock. E&P for start of next year. (4/12) * 30k excess current E&P = 10k. -Accumulated E&P -Corp. E&P. 302(a) applies b/c all of S’s interest is redeemed.
-resulting in 15k Acc. -Now. E&P. -Acc. allocate Acc. -So. -How much of the 12/31 Sec. -meaning. E&P to each SH. -so. -Result: Sec. allocate the 90k Acc. E&P first to the 302 redemption. allocate 60k equally among the SH’s (meaning 20k of current E&P to each SH). We have no excess E&P to allocate. 20k is from Current E&P and 15k is from Acc. 312(a)(3). -for each SH: 35k – 20k current E&P = 15k left to deal with. -S’s Tax Consequences: -70k gain recognized = A/R: 150k – AB: 80k.94 Problem 1(b) -same result as above for Corporation’s tax consequences. -Answer: -SH’s 35k 301 distribution. 312(b)(1). (b)(2). . E&P is 30k = 120k * (1/4). E&P left is 90k = 120k – 30k. 301 distributions are dividends? -Current E&P is 60k from 311(b) gain of 60k = A/R: 150k – AB: 90k. -Sec. -go chronologically for Acc. (f)(1). E&P as to 301 and 302. (n)(7) downward adjustment to the 120k Acc. -Sec. E&P among SH’s. look to Accumulated E&P. E&P for next year: 45k = 90k – (15k * 3). the Acc. -Next. 302(a) says to treat as exchange for payment.
-Exception: The amount to use only includes amount of stock actually owned by Pship. (3) his grandchildren.BUT Owner 1 to Entity to Owner 2 is not ok. 318(a)(3) Attribution to Entities -Partnership constructively owns stock owned by partners. give all owned by SH or partner. 318 be considered as actually owned. Entity to Family Member to Family Member is ok for reattribution. 318(a) (2). -Exception: no reattribution of stock constructively owned as result of Sec. Reattribution Rules: General Rule: stock constructively owned by person by reason of Sec. -a SH who owns 50% or more Corp’s stock constructively owns stock owned by Corp. don’t reattribute stock constructively owned by P-ship. 302(c) says this rule apply).95 Chapter 6. 243. 318(a)(2) Attribution from Entities -stock owned by p-ship is constructively owned by partners in proportion of partners ownership in p-ship. and (4) his parents. 318: 1. *NOTE: reattribution from Sec. -Sec. See Sec. Sec. 2. constructively owns stock owned by SH who own 50% or more in value of stock in Corp. 318(a)(3) is ok. 318 Constructive Ownership of Stock -only apply when particular statute says so (i. Stock owned by entity under Sec. meaning Owner’s attributed shares from Entity 1 may be reattributed to Entity 2. in proportion to that SH’s ownership.e.Sec. . 351 or Sec. -Attributions is proportional. 318(a)(5)(C). -Corp. Quick Reattribution Rules: .Sec. Sec. 318(a)(2) to Sec. 318(a)(3) can’t be reattributed under Sec. (2) his children. -this allows for re-attribution of stock. o Also. Substantially Disproportionate Redemptions -Sec. Section 2. meaning can’t reattribute shares attributed to Entity by Owner 1 to Owner 2. 3.Entity 1 to Owner to Entity 2 is ok. 318(a) (1) Members of Family. . 318 does not apply to Sec.Sec. 318(a)(5)(A). 318(a)(1) Family -an individual shall be considered owning stock owned directly or indirectly by (1) his spouse. 318 for purposes of applying Sec. -Three Categories of Sec. -Attributions is not proportional.
and does not decrease. S constructively owns all 20 shares owned by F (S’s father). -Then b/c of ST P-ship owning 50 shares. 318 says to count shares once. Ownership of the X stock is as follows: (1) S owns 50 shares. 318(a)(3). -Then.96 In-Class Examples Chapter 6. then constructively owns 50 shares from S. and the ST Partnership owns 50 shares. -Sec. S constructively owns 25 shares. S and T each own a 50% partnership interest in the ST Partnership. no double counting. S and T are unrelated individuals. (2) S owns 30 shares. Sec. Section 2 Attribution General Assumptions: X Corporation has 100 shares of common stock outstanding. is never treated as constructively owning its own shares. -so. b/c of Sec. 318(a)(1). then constructively owns 25 shares b/c of 50% p-ship interest. Sec. (b) Notes: (b) . 318(a)(2). (a) How many shares in X is S treated as owning under § 318? -S actually owns 30 shares. -Total owned by S: 75 = 30 + 25 + 20. G is F’s father (S’s grandfather). (a) How many shares in X is S treated as owning under § 318? -S actually owns 50 shares of X Corp. -Sec. How many shares in X is the ST Partnership treated as owning under § 318? -Actual: 50. -Constructive: 50 from S (30 from S and then 20 from S b/c of F) -general rule is that constructive ownership by Partner (the 20 shares attributed from F to S) can be reattributed to P-ship under attribution to entities. 318(a)(2). Sec. -Corp. Sec. 318(a) (3). -Total: 75 shares. 318(a)(5)(A). How many shares in X is the ST Partnership treated as owning under § 318? -ST owns 50 shares. and F owns 20 shares. -Sec. 318 increases shares owned by persons. F is S’s father. same shares can be owned at same time by more than one SH. the ST Partnership owns 50 shares.
How many shares in X is F treated as owning under § 318? -Actual: 20. -Constructive: 55 (30 + 25 from p-ship interest). -reattribution of S’s 25 constructively owned stock from p-ship interest may be reattributed to F. Sec. 318(a)(5)(A).
Limitations on Reattribution Sec. 318(a)(5)(A) General Rule: stock constructively owned by person by reason of Sec. 318 for purposes of applying Sec. 318 be considered as actually owned. Sec. 318(a)(5)(A). -this allows for re-attribution of stock. -Exception: no reattribution of stock constructively owned as result of Sec. 318(a) (1) Members of Family. -Exception: The amount to use only includes amount of stock actually owned by Pship, don’t reattribute stock constructively owned by P-ship. See Sec. 318(a)(5)(C). Stock owned by entity under Sec. 318(a)(3) can’t be reattributed under Sec. 318(a) (2) to partners or SH’s. (3) S owns 40 shares, F owns 30 shares, and G owns 30 shares. (a) How many shares in X is F treated as owning under § 318? -Actual: 30. -Constructive: 70. -Total: 100. How many shares in X is S treated as owning under § 318? -Actual: 40. -Constructive: 30. Sdoes not constructively own the 30 shares owned by his grandfather b/c gf not listed in Sec. 318(a)(1). -Sec. 318(a)(5)(B) disallows reattribution of stock constructively owned under Family attribution rule Sec. 318(a)(1). -Total: 70. How many shares in X is G treated as owning under § 318? -Actual: 30. -Constructive: 70 = 30 from son and 40 from grandchild. Sec. 318(a)(1). -Total: 100. -Note: Sec. 318(a)(1) says Grandparent constructively owns stock owned by grandchild.
S owns 40 shares, the ST Partnership owns 20 shares, and T owns 40 shares. (a) How many shares in X is the ST Partnership treated as owning under § 318? -Actual: 20. -Constructively: 80 (40 shares from S and 40 shares from T). Sec. 318(a) (3). -Total: 100. How many shares in X is S treated as owning under § 318? -Actual: 40. -Constructive: 10. 50% of 20 shares actually owned. - S owns proportion of stock owned by ST P-ship. The amount to use only includes amount of stock actually owned by P-ship, don’t reattribute stock constructively owned by P-ship. See Sec. 318(a)(5) (C). Stock owned by entity under Sec. 318(a)(3) can’t be reattributed under Sec. 318(a)(2). -Total: 50. How many shares in X is T treated as owning under § 318? -Actual: 40. -Constructive: 10. -Total: 50.
NOTE: if T is S’s wife, then the 40 shares would be attributed to T. (5) S owns 30 shares, the ST Partnership owns 30 shares, SD Corporation owns 30 shares, and D owns 10 shares. SD Corporation has 100 shares of common stock outstanding. S owns 70 shares and D owns 30 shares in SD Corporation. S and D are not related. (a) How many shares in X is S treated as owning under § 318? -Actual: 30. -Constructive: 15 (p-ship, 318(a)(2)(A) + 21 (from Corp. Sec. 318(a)(2)(C) says SH who owns more than 50% of Corp. owns shares owned by Corp in proportion to that SH’s ownership of Corp). -attribution from entities is always proportional. -Total: 66 shares. How many shares in X is the ST Partnership treated as owning under § 318? -Actual: 30. -Constructive: 30 (from S) + 21 (attributed from Corp. to S) -NOTE: reattribution from Sec. 318(a)(2) to Sec. 318(a)(3) is ok. -Total: 81 shares.
99 (c) How many shares in X is D treated as owning under § 318? -Actual: 10. -Constructive: 0 b/c does not own more than 50% of stock. -Total: 10 shares. -NOTE: if D is son of S, then both own 100% of Corp., thus attribute all shares owned by Corp. to both D and S. -now, D would own 100% of SD Corp., but does D now own 100% (meaning 30) shares or 30% (meaning 9) shares?? -BUT it doesn’t really matter, b/c even if say D owns 9 shares, then still S’s 21 shares could be attributed to D, meaning D owns 30 shares. (d) How many shares in X is SD Corporation treated as owning under § 318? -Actual: 30 -Constructive: 30 (from S) + 15 (from S b/c of p-ship interest). -Total: 75 shares.
So, for Reattribution Rules: - Entity 1 to Owner to Entity 2 is ok, meaning Owner’s attributed shares from Entity 1 may be reattributed to Entity 2. o Also, Entity to Family Member to Family Member is ok for reattribution. - BUT Owner 1 to Entity to Owner 2 is not ok, meaning can’t reattribute shares attributed to Entity by Owner 1 to Owner 2. (6) Same as in (5) except SD Corporation is an S corporation (rather than a C corporation). -S Corporation is treated as partnership. Sec. 318(a)(5)(E), meaning there is no 50% threshold for S Corp. (a) How many shares in X is SD Corporation treated as owning under § 318? -Actual: 30. -Constructive: 45 (from S) + 10 (from D) b/c now D is treated as partner. -Total: 85. How many shares in X is D treated as owning under § 318? -Actual: 10. -Constructive: 9 (from SD Corp., b/c proportion of ownership of S Corp) -Total: 19. How many shares in X is S treated as owning under § 318? -Actual: 30. -Constructive: 15 (from p-ship) + 21 (from SD Corp.) -Total: 66. How many shares in X is the ST Partnership treated as owning under § 318?
Sec. -Constructive: 51 from S -Total: 81. 302(b)(1) Test is more facts and circumstances having to look at whether distribution . 302(b) Tests for Redemption: -Sec.100 -Actual: 30.
-Formula: (SH’s Voting Shares Post Redemption / Total Voting Shares Outstanding Post Redemption) must be less than 80% of (SH’s voting shares pre-redemption / Total Voting Shares Outstanding Pre redemption). Section 2 . -Sec. 302(b)(2) Test (more mechanical) -a distribution is substantially if: (i) the SH owns less than 50% of voting power post redemption. -multiply Pre-Redemption ratio by 80%. -that’s 80% of Class A * 80% of total directors = 64% voting power. Sec. In-Class Examples Chapter 6. (ii) 80% Voting Power Test: the SH’s post redemption voting power ratio must be 80% less than SH’s pre redemption voting power ratio. -multiply Pre-Redemption ratio by 80%. (iii) 80% Common Stock Test: the SH’s post redemption common stock ratio must be 80% less than SH’s pre redemption common stock ratio. -Formula: (SH’s Common Stock Post Redemption / Total Common Stock Outstanding Post Redemption) must be less than 80% of (SH’s common stock pre-redemption / Total Common Stock Outstanding Pre redemption). then to satisfy this test. the Post-Redemption ratio must be less than that number. the Post-Redemption ratio must be less than that number. -EX: 100 Class A Voting Stock that elects 8/10 directors and Class B Voting Stock elects 2/10 directors. -SH A owns 80 shares of Class A Stock.101 is substantially disproportionate with respect to SH. 302(b) (2)(B). -even though SH A owns 80 of 200 total shares = 40%. (ex: 80% * 60% = 48%. then to satisfy this test. ratio: (post redemption stock / outstanding voting) -looks at total combined voting power. must be less than 48%).
2&3. -so. 318(a). X redeems 30 shares from Alan. Alan and Bill are not related. which it does in this problem b/c 43% is less than 48%. -Pre-Redemption Ownership is 60%.* 2 & 3. 318 b/c satisfies 302(b)(2). *Remember to decrease outstanding shares for denominator when doing this formula by # of shares redeemed. So. Voting Power.102 Section 302(b)(2) (1) X Corporation has 100 shares of voting common stock outstanding. and 80% of 60% is 48%. -Thus. this is treated as exchange under Sec. 3 part test: 1. Alan owns 60 shares of voting common stock and all 100 shares of nonvoting preferred stock. this scenario does not satisfy Sec. Sec. -so. 318(b)(2). and Bill owns 40 shares. which is less than 50% voting power. 80% Voting Shares and 80% Common Stock Test. this part is satisfied. -A now owns 30 shares of 70 outstanding voting shares. -Post Redemption: 100% -Pre Redemption: 100% -Thus. (2) X Corporation has 100 shares of voting common stock and 100 shares of nonvoting preferred stock outstanding. A’s post-redemption ownership must be less than 48% to satisfy this part of test. (a) Does the redemption meet the test in § 302(b)(2)? -3 Part Test: 1. -30 / 70 = 43%. 50% Voting Power Test. (b) What if Bill is Alan’s father? -A now is considered owning all 100 shares. -Post-Redemption Ownership is 43%. 100% = 70 / 70. Alan owns 60 shares. Bill owns 40 shares of voting common .
(3) X Corporation has 100 shares of voting common stock and 100 shares of nonvoting common stock outstanding. 302(b)(2) b/c there is no decline in SH’s voting power. 77-237 -H owns 60 shares of Voting Common stock. Rul. and the nonvoting common stock has a FMV of 100 per share. 1. (a) Does the redemption meet the test in § 302(b)(2)? -No. -IRS let Wife piggy back on H’s redemption. 1. X redeems 50 shares of nonvoting preferred stock from Alan. then redemption of non-voting preferred stock qualifies when redeemed simultaneously with redemption of voting common stock. What if X also redeems 30 shares of voting common stock from Alan? -Yes. -W owns 10 shares of non-voting preferred stock. 302(b)(2). When SH has voting common stock that satisfies Sec. (b) Rev. The voting common stock has a FMV of 200 per share. Alan owns 60 shares . Reg. redeems 2 shares of W’s non-voting stock and 30 shares of H’s voting common stock? -Then both get exchange treatment b/c of attribution rules. -What if Corp. Alan and Bill are not related. b/c Reg. -3rd party owns 40 voting common stock.302-3(a) says that redemption solely of non-voting stock (whether preferred or common) can never satisfy Sec.302-3.103 stock.
and Bill owns all 100 shares of . 80% Voting Power Test is satisfied b/c 43% post. -Rev.66%. and 60% pre. -22k/30k = 73. 80% Common Stock Test. Alan owns all 100 shares of voting preferred stock. b/c 43% is less than 48% (80% * 60%).33% by 80% = 58. -But last sentence of 302(b)(2)(C) says to aggregate in relation to FMV. 2. 3. and 43% is 80% less than pre. Rul. aggregate those shares pursuant to Sec. X redeems 30 shares of voting common stock and 50 shares of nonvoting common stock from Alan. 87-88 held when there are multiple common stock classes. Also. Both classes of voting stock have 1 vote per share. Bill owns 40 shares of voting common stock. = 57.104 of voting common stock and all 100 shares of nonvoting common stock.33% -then multiply 73.66%. thus 80% Common Stock Test is satisfied. Does the redemption meet the test in § 302(b)(2)? -issue here is 80% Common Stock Test. there is just req’t that own less than 50% of Voting Power. 302(b)(2)(C). -Post-Redemption: -FMV owned: 11k / total FMV: 19k. this works b/c of applying common stock on aggregate basis rather than class-by-class basis. 50% is satisfied b/c 30/70 = 43%. which is less than 58. Redemption of Voting Preferred Stock (4) X Corporation has 100 shares of voting common stock and 100 shares of voting preferred stock outstanding.89%. -3 part test: 1. fact that A still owns 100% of non-voting common stock pre and post is ok. Alan and Bill are not related. -NOTE: fact that A still owns more than 50% of Common Stock is fine. -Pre Redemption -Total FMV of all shares is 30k = 100 shares * $200 per share = 20k + 100 shares * $100 per share = 10k. -FMV of shares owned by A is 22k = 100 NVCS * 100 per share = 10k + 60 VCS * 200 per share = 12k.
-Rev. Alan and Bill are not related. 81-41 says SH can’t own any common stock. -3 Part Test: 1. -Thus. Rul. go to Sec. and the 80% Common Stock Test is just a safeguard for equity interest abuse while losing voting interest. 301 distribution. Alan and Bill are not related. Rul. -so. (a) Does the redemption meet the test in § 302(b)(2)? -only preferred stock is being redeemed. 81-41 said redemption solely of preferred voting stock works if SH owns no common stock before or after redemption.105 voting common stock. What if Bill owns 90 shares of voting common stock and the other 10 shares of voting common stock are owned Alan’s son? -Then redemption of Allan’s preferred stock does not work b/c Allan now owns common stock constructively. Bill owns 40 shares and is the vice president of X.5% 2. -reasoning is b/c of legislative history was concerned with 80% Voting Test. 80% Voting Test is satisfied b/c Pre ratio is 50% (100/200) -50% * 80% = 40%. *3. -Rev. Rul. X redeems 40 shares of voting preferred stock from Alan. . 81-41 says that 302(b)(2) could apply to a redemption solely of preferred voting stock if SH does not own any common stock before or after redemption. there is no abuse.5% is less than 40%. 50% Voting Power Test is satisfied b/c 60 / 160 = 37. so this test is satisfied. 302(d) which says to treat redemption as Sec. 302(b)(2)(D)) (5) X Corporation has 100 shares of voting common stock outstanding. Alan owns 60 shares and is the president of X. when owning no Common Stock. 80% Common Stock Test -Rev. X has an agreement in place with each shareholder. and Post ratio of 37. (b) Series of Redemption (Sec.
106 which provides that the shareholder’s stock will be redeemed by X upon the shareholder’s retirement. Bill announces that he will be retiring in a month. Alan then arranges to have X redeem 30 of his shares. One week after Alan’s 30 shares are redeemed, Bill retires and X redeems all 40 of Bill’s shares. Does the redemption of Alan’s shares meet the test in § 302(b)(2)? -What happens? -Bill announces retirement, and on retirement, Corp. redeems 40 shares of VCS from Bill. -also, on retirement, Corp. redeems 30 shares from Allan. -Redemption of Allan’s shares satisfies 302(b)(2): 1. 50% b/c post redemption is 42.86% 2. 80% b/c 42.86% is less than 48% (60% * 80%) 3. same as 2. -BUT after Bill’s retirement, Allan owns 100% of Corp, so redemption under 302(b)(2) is not satisfied. -So, question is whether Sec. 302(b)(2)(D) is triggered? Do we have a plan? -Sec. 302(b)(2)(D) requires the TP to treat as series of redemption made pursuant to a plan as a single redemption in testing the disproportionately of the redemption. -Rev. Rul. 85-14 says a plan does not require joint action or a written plan b/t 2 or more SH’s. It is sufficient if single SH arranges for redemption of shares as a larger series of events that will restore to SH the portion of ownership he temporarily lost. -in this problem, we have this b/c Alan knew that giving up control req’t (voting ownership) thru redemption would be restored to full control (majority that he had before) after Bill’s redemption. -Answer: Bill’s redemption does not qualify for Sec. 302(b)(2) b/c it is series treated as plan. What if Bill plans to sell his 40 shares to Alan but before sale, Alan has his shares redeemed? -Then Sec. 302(b)(2)(D) is triggered, treat as single redemption. Don’t qualify for redemption treatment.
Chapter 6. Section 2. Problems 1-8 (p. 30-33) 1. Champion has 100 shares of common stock and 200 shares of nonvoting preferred stock outstanding. D owns 70 shares of common stock and K owns 30 shares of common stock. K also owns 100 shares of nonvoting preferred. Which, if any, of the following
107 redemptions qualifies under §302(b)(2) and what are the tax consequences? (a) Corp. redeems 5 shares of common stock from K for $5000. K’s basis in his 30 shares was $900 per share and $27,000 total. o §302(b)(2) governs (3-Part Test):
1. §302(b)(2)(B) Limitation (50% Test) – won’t be in §302(b)(2) unless immediately after the redemption the SH owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote he satisfies 50% test b/c owns less than 50%; he owns 26.32% (25/95). 2&3. 80% Tests §302(b)(2)(C) defines “substantially disproportionate” ratio to which the voting stock of the corporation owned by the Sh immediately after the redemption bears to all voting stock at the time (25/95) is less than 80% of the ratio which the voting stock of the corporation owned by the SH immediately before the redemption bears to all voting stock at that time (30/100) Post: 25/95 is about 26.32% and Pre: 30/100 is 30%
80% of 30% is 24% and 26.32% is greater than 24%. o so this is not a substantially disproportionate distribution and §302(a) will not apply
§302(d) says to use 301 distribution rules for this “5k redemption.”
Remaining basis to the shares transfers over to his 25 remaining stares total basis doesn’t change, meaning basis is still 27k for all 25 shares. Reg. 1.3022(c) says that basis of redeemed stock is added to the basis of the other stock (same class of stock) held by Taxpayer. (meaning the 4,500 AB in redeemed shares is shifted over to remaining 25 shares owned by K, thus having a 1,080 basis per share (27k/25 shares). o §301 applies
Think about whether this may satisfy Sec. 301(b)(1) test.
(b)(1) C redeems 10 shares of common stock from K for $10,000. K’s basis in the shares is 900 per share and $27,000 total. o 3-Part Test: o 1. 50% Test is satisfied b/c owns less than 50%; he owns 22% (20/90) Sec. 302(b)(2)(B).
o 2. 80% Voting Stock and 80% Common Stock tests are satisfied b/c . . .
108 §302(b)(2)(C) ratios
Post-redemption: 20/90 = 22% Pre-redemption: 30/100 = 30%
80% of 30% = 24% for 80% Voting and 80% Common Stock Test, meaning need postredemption ratio to be less than 24% to satisfy the 80% tests.
o Post-Redemption ratio of 22% is less than 24%, so 80% Tests are satisfied, meaning . . .
Sec. 302(b)(2) is satisfied, so §302(a) (see also Sec. 317(b) Redemption of Stock) exchange treatment applies.
§302(a) Exchange Treatment – going to have payment and regular capital gains for the SH.
K will have a $1,000 capital gain b/c A/R: 10k – AB: 9k (for 10 shares) from the redemption per the gain recognition rules in §1001(a), 1001(c) recognize gain, Sec. 61(a)(3) gain from dealings in property.
o What is K’s remaining basis in 20 shares?
18k basis b/c 27k starting basis less 9k basis recovered b/c of redemption.
(b)(2) What if K’s basis is $1,200 per share and $36,000 total? o We’ll still be in §302(a) but now the SH will have a loss on the redemption of $200 per share or a total loss of $2,000 from the redemption o A/R: 10k – AB: 12 = 2k cap. loss. Sec. 1001(a), 1001(c).
Any deductibility for the loss? Yes, under Sec. 165(a) – 165(f) – 1211/1212.
§267 will deny loss on sale or exchange b/t related parties SH is related if he owns more than 50% of the stock by value. He clearly owns less than 50% of the vote. So, deductible loss is not disallowed.
Remember this ownership is based on total value of stock.
(c) Corp. redeems 35 shares of common stock from D? o Post: 35/65 = 53.85% of voting power post-redemption.
1. 1. 302(b)(2)(B) says SH must own less than 50% (meaning 49. redeems 40 shares of CS from D? o D now has 30/60 shares so we still can’t use §302(b)(2) b/c not satisfying 50% test since D still owns 50% of shares. the FMV of all the common stock (voting and non-voting) will govern the determination of whether there has been the requisite reduction in common stock ownership o This deals with the flush language of §302(b)(2) o Voting stock: . The regulations say that the SH adds the basis to the shares he still holds onto. (f) Corp. Sec. o Won’t apply b/c 302 deals with common voting stock – without some common voting stock we can’t use it.302-3 says a redemption of non-voting preferred or common stock may qualify under Sec. o Reg. (d) Corp.9% or less). o We get to the limitation in §302(b)(2)(B) b/c D still owns more than 50% of the voting rights in the corporation (35 out of 65 shares).109 o Pre: 70/100 = 70%. the SH’s tax consequences aren’t exchange treatment so there is no real recovery of basis. he doesn’t have a significant change in voting power. o There could be an argument that the not essentially equivalent to a dividend is met (e) Corp. Therefore. 302(b)(2) only if there is a simultaneous redemption of voting stock. o D does not own less than 50% of Voting Power. o Whenever a redemption gets treated as 301.302-2(c). redeems 15 shares of cs and 50 of ps from K o RR 87-88 – under §302(b)(2) applies to voting stock and other stock (although not the redemption of solely nonvoting stock) o If there is more than one class of common stock outstanding. redeems 50 shares of non-voting preferred stock from K. o §301(a) applies b/c of §302(d) o Basis gets added to shares he retains!!!!! Reg.
o 3. o 2. satisfies 80% Common Stock Test (same as 2). 1. .302-3 o §302(a) will apply for both redemption of Voting common stock and for nonvoting preferred stock.110 o o Post: 15/85 = 17. o 3-Part Test under 302(b)(2) is satisfied: o 1. satisfies 50% Test b/c K now owns 17. we get to piggy back the non voting preferred stock from 1.65 Pre: 30/100 – 30% o This works for the requirements o Since there is only one class of voting stock (and common stock).65% of voting power (15/85). 302(b)(2) only if there is a simultaneous redemption of voting stock. satisfies 80% Voting Test b/c 17. meaning A/R less AB for each class.302-3 says a redemption of non-voting preferred or common stock may qualify under Sec. See Reg. o Point is that non-voting preferred stock gets to piggy back on common stock satisfying 302(b)(2) and that preferred non-voting stock does not have to satisfy any part of 3 par test. o NOTE: you will do exchange treatment class-by-class.65% is less than 24% (30% * 80%).
50% Test is satisfied b/c post-redemption Voting Power is 42. Meaning. redeemed 30 shares. TS Corp has 100 shares of voting common stock outstanding. M’s redemption satisfies Sec. • Sec. and 42. 3-Part Test 1. • • 12/31 Corp. o If included redemption of W’s shares in plan.111 Series of Distributions (Sec. 1st does M’s redemption on 2/1 satisfy 302(b)(2)? o Yes. redeems 30 shares of VCS from M. the corporation redeemed all of W’s shares from his estate.86% is not 80% less than Pre ratio of 60% since 60% * 80% is 48%. Does M’s redemption qualify under §302(b)(2). 302(b)(2)(D) could be triggered. Problem presents issue re: series of redemptions • 2/1 Corp. 302(b)(2). then M would own 100% of shares and thus not satisfy 302(b)(2). Commissioner – held that a possible future redemption upon the subsequent death of a SH pursuant to an executory buysell agreement should not be considered as part of a plan testing whether a current redemption met the test of §302(b)(2) • . 1. redeems 40 shares of VCS from W. They have both worked full time for the corporation. 1. No reduction in A’s interest is to be measured immediately but only after redemption of B’s shares. 80% Test is satisfied b/c Post ratio of 42. On Aug. o Glacier State held that the possible future redemption of SH’s shares b/c of SH’s death pursuant to a buy-sell agreement should not be considered as part of a plan testing a current redemption met 302(b)(2).86%. So. • RR 85-14 held that the existence of a “plan” does not require an agreement b/t two or more SH. In December. leaving most management to W and TS Corp. M went into semi-retirement. 302(b)(2)(D)) Problem 2. W died and M went back to work. but may be satisfied by a designed by a single redeemed SH to arrange a redemption as part of a sequence of events that ultimately restores a SH to the control that was apparently reduced in the redemption.86% is less than 48%. M owns 60 shares and W owns 40 shares. 2&3. 302(b)(2)(D) is not triggered in problem 2. Glacier State Electric Supply v. On Feb.
Basis left for 14 shares: 3.000 10k div – 8k CG drd** = 2k NI 8k basis reduction*** 2 2 years ago 8 8k 4800 3. owns 60 VCS -Redemptions: Date Shares Redeemed AB in If 302(a) If 302(a) Redeemed Price Redeemed applies* does not Shares apply 1 3 years ago 10 10k 6k 4. -To start: HV Corp. Total 26 26k 15.200 8k div – CG 6400 drd = 1600 NI 6400 basis red.000 5k div – 4k CG drd = 1k NI 4k basis red.800 basis red.400 5. owns 40 VCS with AB of 600 per share and BP Corp. 4 This year 3 3k 1200 1.200 . 3 1 year ago 5 5k 3k 2. after B’s redemption post-mortem.85% o 80% of 60% = 48% o so we’ll have a 302(a) redemption rather than 301 • If we’d been within the RR.200 NI CG 20. then M would be the 100% owner after the redemption and we’d have 301 treatment Problem 3.800 3k div – CG 2400 drd = 600 NI 2400 basis red.600 10.112 • • Arguably within Glacier State exception M o Before: 60/100 = 60% o After: 30/70 = 42.
Pre: 40% b.83% c. 3 years ago a. this happens ____.92% c. and if 302 applies. Does each redemption satisfy 302(b)(2)? 1.08% is greater than 21.33% b. Corp.92% is greater than 17. does not satisfy 80% Tests b/c 26. this happens ________. Pre: 26.08% (17/77) c.08% * 80%) Is 302(b)(2)(D) triggered? -NO. 2&3. ***Basis reduction b/c 1059 Extraordinary Dividend. you got a problem like this one. . Post: 18.33% is greater than 32% (40% * 80%) 2. -this problem needs more facts to determine. b/c need to say if 301 applied.46% (26. 302(b)(2)(D) is triggered when a single redemption is substantially disproportionate. Post: 26.33% c. -point is to show that Corp.27% (33. Post: 33. 2&3.66% (22. qualifies for 80% drd b/c owns at least 20% of Corp. 1 year ago a. NOTE: if on exam. -in this problem we have the reverse in that each redemption is not substantially disproportionate. satisfies 50% d. satisfies 50% Voting Power Test d. do both 301 and 302 results.08% b.83% * 80%) 4. Basis reduction = DRD. **first 3.83% is greater than 26. but in aggregate the series taken together is substantially disproportionate. does not satisfy 80% tests b/c 33. 2 years ago a.33% * 80%) 3. not satisfied b/c 22. but when the single is looked at series.113 *b/c 302(b)(2) is satisfied. 1.83% b. but need more info. Pre: 33. This year a. Post: 22. 2&3 is not satisfied b/c 18. the closeness of each redemption satisfying 302(b)(2) is a factor. Pre: 22. the series is not substantially disproportionate. 1. 2&3. would prefer distributions to be 301 instead of 302 b/c of 243 DRD. -Courts will look to see if series of redemptions are in accordance to a Firm and Fixed Plan – look at facts and circumstances to determine.
Problem 5(a) -E owns 40 VCS and 100 VPS. not preferred stock.318-1. Rul. see also Reg. -so. 3. 318(a)(1)(A)): 1. treat this “redemption” as a 301 distribution. Does this satisfy 302(b)(2)? -3 part test: 1. -Corp. -problem here is that SH owns common stock and preferred stock.55% * 80% = 42. Problem 6(a) -Sec. 80% Common Stock Test – -Pre: 40% (40 / 100) -80% of 40% is 32% -Post: 0% (0 / 60). can’t satisfy 302(b)(2). redeems 30 VCS from Jose.86% 2.: 42. and to determine according to FMV (that is multiply CVS by FMV and NVCS by FMV for fraction). -Post: 27. 80% Voting Stock Test – yes satisfied b/c post: 42. children 3. -satisfied b/c 0% is less than 32%. *for this part. spouse 2. -Pre: (16k = 6k + 10k) / (30k) = 53.67% -as a result.78% (100 / 360) -so.15% -so. 50% Voting Power Test – yes satisfied b/c post: 27. Rul. 318(a) for constructive ownership of stock. 1. 87-88 says to aggregate common stock for 302(b)(2)(C) Common Stock Test.67% -Post: (13k = 6k – 3k + 10k) / (27k = 30k – 3k) = 48.86% is less than 48% (pre 60% * 80%). Does this satisfy 302(b)(2)? -3 part test: 1. -Corp.15% is greater than 42. 80% Voting Stock Test is satisfied b/c 27. 302(c)(1) says to use Sec. 80% Common Stock Test – -Rev. redeems 40 VCS from E. 3. 50% Voting Power Test – yes satisfied b/c post-red.114 Problem 4(a) -Jose owns 60 Voting Common Stock shares (FMV: 6k) and 200 NVCS (FMV: 10k). Problem 5(b) -Rev.78% (100 / 360) 2. 81-41 says redemption of voting preferred stock only works if SH owns no common stock post redemption. -Related Family Members (from Sec. See 302(d). 80% Voting Stock Test – -Pre: 35% (140 / 400) -80% of 35% is 28%. only look at common stock. grandchildren . this test is not satisfied b/c 48.78% is less than 28%.
05% is greater than 36%. . so satisfied. And. -Pre: 45% -80% of 45% is 36%. Problem 6(d) -Yes. b/c post-redemption Voting Power is 65. parents Amy Actually Own 25 Constructively Own 60 = 15 from B + 15 from D + 15 from E + 15 from F. b/c . Problem 7 -A directly owns 15 shares of Y Corp. Problem 6(c) -No. in which A owns 60% of Z Corp.22% is less than 24%.22% -and 22. in which A is 1/3 partner. . Amy doesn’t constructively own shares from C b/c C is not family member and b/c can’t reattribute family attributions. -Pre: 30% -80% of 30% is 24% -Post: 22. which is greater than 50%.. b/c . Z Corp owns 40 shares. -Post: 36. how many shares does A own? .115 4.05% And 36. . -So.12%. 55 = 25 from A + 15 from C + 15 from D 30 = 15 from B + 15 from D 30 = 15 from B + 15 from C 40 = 25 from A + 15 from F 15 from E Total 85 Ben Cindy David Evan Fran 15 15 15 15 15 70 45 45 55 30 Problem 6(b) -No. then ABC P-ship owns 45 shares. .
37% is greater than 48%. and in W Corp. b/c of 50% interest in V. -there is no limit of going Entity – to SH/Partner to – Entity. b/c of 50% interest in W. 302(b)(2)? -Pre: 54% (54 / 100) -80% of 54% is 43.37% = (19 actual + 20 constructive / 79) -49. -Constructively: 20 from D b/c of reattribution rules. -V Corp. 1. -Why? -for Corp. reduce 76k stock basis by 80k = (4k). -Sec.2%. treat as 301 distribution. so 302(b)(2) is not satisfied. 318(a)(5)(A) says person is treated as actually owning shares for reattribution purposes unless otherwise stated. -302(b)(2)? -Pre: 60% = (60/ 100) -80% of 60% is 48% -Post: 49. -How many shares does W Corp. and 4k is treated as capital gain. 302(d). – 80k DRD = 20k NI. . -so. each own 40 shares.116 -A owns 15 shares directly + constructively 24 from Z Corp. since A owns at least 50% of Corp. the dividend is treated as extraordinary. -so. and W’s basis in shares = 40k. he proportionately (60%) owns shares owned by Corp. and W Corp. Sec.89% is greater than 43. so now basis = 0. in Q Corp. regardless how long SH has owned stock. A owns in proportion (1/3) shares owned by P-ship. -D constructively owns 20 shares of Q Corp. Problem 8 -D owns 50% stock interest in V Corp. which is 80k. 100k Div. so fails 302(b)(2). -What is basis though? -36k AB in remaining shares + 40k AB in redeemed shares (b/c of Reg. -for P-ship. -remember excess of basis is CG. b/c under Sec. -Total shares owned by A = 54 shares. then all 100k is a dividend. -this triggers 243 DRD.2%. -now. own? -Actually: 40 shares. 302(d). + 15 from P-ship. respectively. **-What about Sec.. -Post: 48.302-2(c) and Examples) = 76k. -thus. redeems 21 shares from W Corp. -As a result. there is a 80k Basis Reduction (that is amount of DRD b/c untaxed portion). -If E&P are 100k. 1059 Extraordinary Dividend? -1059(e)(1) says when not paying dividend pro-rata (meaning same to all SH’s). treat this as a 301 distribution. -then Q Corp. See Sec.89% (44/90) -48. -and 20 shares of Q Corp.
*can only waive Family Attribution. director. . b/c can’t work for 302(b)(2) since it’s Voting Stock and (2) when there is the issue of Family Attribution. 302(b)(3) test -Sec. So. -if don’t notify IRS of prohibited interest. treat Chad as only owning 50 shares. Waiver of Family Attribution is only for purposes of Sec. 302(c)(A). 2. SH may not have prohibited interest in Corp. -So. -Chad can’t satisfy 302(b)(2) b/c of family attribution rules in 318. -What if Redemption satisfies 302(b)(2) and 302(b)(3)? -b/c this usually happens when redeeming all shares of SH. AND SH must file an agreement with the IRS that SH will notify IRS of any acquisition of a prohibited interest. -prohibited interest includes interest as officer. -Family Attribution Issue: -Chad owns 50 shares and his daughter Dana owns 50 shares. or employee. 302(b)(3). Chad constructively owns 25 shares. and CD P-ship owns 50 shares in which Chad is a 50% partner. AND SH may not acaquire any prohibited interest (other than by bequest or inheritance) within 10 years from date of such distribution.117 **Look at 1059(e)(1) Rule** Chapter 6. thus satisfies 302(b)(3). immediately after distribution. not Entity Attribution. Section 3: Transaction of a SH’s Interest -Sec. other than acting as a creditor. then SOL stays open indefinitely. 3. owned by the SH. -BUT Chad can satisfy 302(b)(3) b/c of req’s for waiving family attribution in Sec. -then the IRS is given 1 year to assess a tax on prohibited interest acquired by SH. 302(a) shall apply if the redemption is in complete redemption of all of the stock of the Corp. -EX: Chad owns 50 shares.. -3 Requirements for Waiver of Family Attribution 1. -302(b)(3) adds something (1) when redemption is of all Non-Voting Common Stock owned by SH.
then C gifts 10k to Dana. C has daughter Dana. each related person must satisfy 3 req’s above. the Entity needs to waive Family Attribution to qualify for 302(b)(3). -this will make it so C does not constructively own E’s shares. -Sec. C owning shares thru another entity. W (C’s wife) owns 50 shares. C gifts 10 shares of stock to Dana (all tax free) with AB of 7k . 318(a) Family Attribution. 1001 treats 10k less 7k AB = 3k gain. -Related Person is defined under Sec. 10k redemption. therefore Chad fails 302(b)(3) test. X Corp. 2. which also would be treated as 301 distribution. C constructively owns 50 shares (W’s shares). redeems all 50 shares of CD P-ship. in which C owns 50% of pship. -NOTE: this only works when SH (C from above) does not own any shares outright. then C has Corp. 2. and C would like to make 10k gift to Dana. -also. if C does own shares outright. 302(c)(2)(B)(i) and (ii).118 -can’t waive Entity Attribution. thus 10k dividend. -Requirements: 1. (Tax . each related person must be held jointly and severally liable for prohibited interest. Prevents Waiver of Family Attribution -Sec. (FMV of 1k per share and AB of 700 per share). can’t waive that attribution. 302(c)(2)(B)(i) since D acquired stock 10 years before redemption and b/c D acquired stock from C (who’s stock would be attributed to C under Family Attribution rules) AND acquired stock for Tax Avoidance purpose. -this will qualify for 302(b)(3) if the Waiver is available. -Example 1: C owns 100 shares of X Corp. 3. which are attributed to CD P-ship. redeem Dana’s 10 shares for 10k cash. 10k dividend . Entity using Waiver of Family Attribution Example: What if Corp. then waiving family attribution won’t work. So. -C’s Options: 1. -and fails 302(b)(2) test b/c owns 50% voting power.301 distribution paid to C. has Current E&P of 100k. -Now. And. -BUT this is not allowed by Sec.
will the redemption meet the test in § 302(b)(3)? X Corporation has 100 shares of voting common stock outstanding. 1. Erin owns 50 shares. See Reg. Chad and Dana are not related. -meaning.302-2(c). Chad and Dana each own a 50% interest in the CD Partnership. then Dana changed mind and had redemption? -this is ok b/c purpose is not for tax avoidance. Chad and Dana are unrelated. Section 3 (1) X Corporation has 100 shares of voting common stock outstanding.119 Avoidance means acquiring shares with anticipation of subsequent redemption). and no shifting of basis. Chad and Dana are unrelated. -Meaning the 7k basis of redeemed shares goes to C’s basis. Chad owns 50 shares. Waiver of Family Attribution is allowed. -Example 2: In-Class Examples Chapter 6. -What if instead C gifted 10 shares to Dana hoping Dana would take over family business. thus 10k dividend. Chad owns 50 shares. and Dana owns 50 shares. Chad and Dana each own a 50% interest in the CD Partnership. 302(b)(3) is satisfied. (a) (b) (c) (2) Does the redemption meet the test in § 302(b)(3)? Does it meet the test in § 302(b)(2)? What if Chad’s shares are nonvoting? What if Dana is Chad’s daughter? X Corporation has 100 shares of voting common stock outstanding. treat the 10k redemption as 301 distribution. and the CD Partnership owns 50 shares. X redeems Chad’s 50 shares. If X redeems Chad’s 50 shares. -What happens to D’s basis of redeemed shares? -the basis of the redeemed shares is added to the basis of the related persons whose shares were attributed to the redeemed SH. If (3) . -Thus. -thus. Erin is Chad’s wife. -this is applicable only when SH’s entire interest is redeemed. and the CD Partnership owns 50 shares.
What are the tax consequences if X distributes 10. and the CD Partnership owns 50 shares.000? What are the tax consequences if Chad transfers 10 shares to Dana as a gift and then has X redeem Dana’s 10 shares for 10. b/c 302(d) says use 301. X Corporation has 100 shares of voting common stock outstanding. -don’t want SH to get redemption. she decides to pursue other interests and has X redeem her 10 shares. but after a few years. but at same time retain indirect control over Corp.000? -Sec. Chad also wants to retain effective control over X.120 X redeems the CD Partnership’s 50 shares. Same as (3) except Erin owns 30 shares.000 to Chad as an ordinary § 301 distribution or redeems 10 shares of Chad’s stock for 10. Chad retires and has X redeem his remaining 10 shares. Assume instead that Chad transfers 90 shares to his daughter Dana as a gift because she has become actively involved in managing the business and plans to take over when Chad retires. X has cash in excess of its business needs. Does the redemption qualify for exchange treatment under § 302(b)(3)? -this transfer by Chad to Dana was not made for tax avoidance purpose. Chad owns all 100 shares (FMV = 1. AND b/c this transfer of shares was for Tax Avoidance. Dana accepts the shares. C transferred stock to E (whose stock ownership is attributable to C). and the CD Partnership owns 50 shares. What are the tax consequences if Chad transfers 90 shares to his wife Erin as a gift and then has X redeem his remaining 10 shares for 10. Chad and Fred (an unrelated party) each own 50% of the stock in CF Corporation. A few years later. CF Corporation owns 20 shares.000 per share. 302(c)(2)(B)(ii) When Transferring SH’s Stock is Redeemed is aimed at this type of scenario. (6) (b) (c) (d) . -Answer: treat as dividend. will the redemption meet the test in § 302(b)(3)? (4) (5) Same as (3) except Erin owns 30 shares. (a) Chad would like to use some of X’s excess cash to make a 10. Chad owns 20 shares.000. X has current E&P of 100. basis = 700 per share).000? Assume instead that Chad transfers 10 shares to Dana because he wants to encourage her to become involved in the business so that she can eventually take over when he retires.000 of its excess cash to him at the lowest tax cost possible. Does the redemption qualify for exchange treatment under § 302(b)(3)? Chad would like to have X distribute 10. saying that Waiver is not available to Chad b/c within 10 year period prior to redemption.000 gift to his daughter Dana.
-interest rate probably cannot be dependent upon earning of Corp.302-4(d): -payment cannot be dependent upon earnings of Corp. 1. Problem 2(b)(1) -with promissory note. -IRS says transferring to spouse is indirect control. ok). 302(b)(3). so fact that T is nephew is irrelevant b/c nephew is not attributable under 318(a) family attribution rules. 302(c)(2)(A) is only for waiving Family Attribution. this satisfies Sec. and said that SI in stock is ok. but enforcing the SI and acquiring the stock is a prohibited interest. property is ok (so SI in prop. -so. the 10 shares are attributed to C. -BUT remember could still satisfy 302(b)(2). -look at whether debt is subordinate to other creditors (if yes then more equity like). then Henry may waive family attribution rules.121 -Tax Avoidance Purpose is when SH gets redemption treatment. -Remember Grandparents are not Family Members for 318(a). what if C’s son owns 10 shares of Corp. and thus satisfy 302(b)(3) complete redemption test b/c owns no shares now. -fact that T is nephew is irrelevant. redeems all 50 shares of C. BUT transfer to son or daughter is not indirect control. See Lynch . the question is whether the note is debt or equity? -b/c generally a creditor interest is not a prohibited interest. -Pre: 60% -Post 10/50 = 20% Problem 2(a) -if Henry satisfies 3 requirements under Sec. Problem 1 -Corp. -Sec.302-4(e) says re-acquisition of Corp. C can’t waive family attribution rules under 302(c).? -now. -Answer: Chad gets exchange treatment under 302. but at same time retains indirect control over Corp. -BUT courts have not agreed with this. 302(c)(2)(A). (that is C retains a prohibited interest). no need to waive family attribution rules. -and b/c C remains as an employee with Corp. but that re-acquisition of stock is prohibited. -Now. is this promissory note a real creditor interest or -Factors (see Reg. 1. -Reg. (so SI in stock is prohibited interest).
but the 1st 3 will not be counted as redemption. ok to waive Family Attribution? -Sec. he is an Independent Contractor. -Bleily and Collishaw says plan can be spread out over fixed time period. Independent Contractor Prohibited Interest? (waive family attribution?) Problem 4(c) -Is T working as lawyer for Corp. 302(c)(2)(A) lists employment as prohibited interest. it’s important that R not staying involved in managing corp. -fact that T is being unpaid is irrelevant. R owns 60 shares. Firm and Fixed Plan Test Problem 3 -Corp. has 100 shares. -unrelated party was factor b/c that party ensures plan is carried out -whereas. at 1st redemption. ok to waive Family Attribution? -NO. -Merril Lynch says plan need not be in writing or legally enforceable. -If not aggregated. 302(c)(2)(A)). -also. -If aggregated. and O (R’s son) owns 40 shares. then the last redemption will be counted as redemption. fact R sent in notice to IRS saying he’d notify if obtained prohibited interest. (R is retiring). (does SH something akin to an equity interest. -Corp. -fixed time period. -need to be made to a firm and fixed plan. b/c T is still holding a prohibited interest (in that T is remaining as a Director which is a prohibited interest under Sec. -Requirement for Serial Redemptions to be Aggregated and counted as One for 302(b)(3) Complete Redemption: -more than a gentleman’s handshake. -BUT T is not employee. -party no longer operating or working in Corp. – that is retiring. that is compensation tied to future . -So.122 Serial Redemption Issue. count as one complete redemption -RA: looks like plan in problem is firm and fixed b/c of fixed time frame. related party may not have interest in ensuring plan is complete. Employee is Prohibited Interest (does not waive Family Attribution Rules) Problem 4(a) -Is T remains as an unpaid Director of Corp. will redeem 15 shares each year till all 60 redeemed. use the Tax Court’s Facts and Circumstances Test based on whether the former SH has either retained a financial stake in the Corp.
-RA: looks like T will qualify b/c his earnings is based on contingent fee. -What about A inheriting shares from C? -that’s not a prohibited interest according to Sec. then has 30 shares redeemed? -this will be harder to prove no tax avoidance b/c IRS deems transfer to Spouse as retaining indirect control. -looks more like J is shifting control to his son and grandson. Inference from RR 85-19. Problem 5(a) -J gifts 20 shares of 70 shares to Grandson. thus there is tax avoidance. -RA: looks like T will not qualify and Family Attribution is not waived b/c independent contractor is a prohibited interest. -problem with this F&C test is that it is uncertain. not earnings of Corp. but receiving by gift is a . Problem 5(b) *What if we change the facts in having J transfer 40 shares to Wife. but (B)(i) is predicated on J’s stock being attributable to Jim-Bob. -Result treat as 302 redemption. 302(c)(2)(B)(i) looks like it might apply. Problem 6(a) -Redemption of A’s 25 shares will qualify for 302(b)(3) if A does not retain a prohibited interest. -9th Circuit (Lynch Case) said that former SH being an Independent Contractor is a per se prohibited interest. satisfies 302(b)(3).) or continued to control the Corp. this is fine. whereas code wanted hard and fast rules for predictability. then has his 50 shares redeemed by Corp. RR 77-293. if J can waive Family Attribution Rules. 302(c)(2)(B)(ii) b/c of J transferring stock to his grandson? -302(c)(2)(B)(ii) applies b/c Redeemed SH (J) transferred stock to a person whose stock ownership is attributable to Redeemed SH within 10 years prior to redemption. receiving shares by inheritance or bequest is not a prohibited interest.123 earnings of Corp. -Result treat as 301 distribution. -Issue is Sec. Problem 5(c) -Sec. -Does redemption of J’s 50 shares qualify under 302(b)(3)? -yes. as long as Jim-Bob meets 3 req’s for 302(c)(2)(A). -IRS takes this position as well. and benefit by its operations. -is this tax avoidance purpose? -looks like not for tax avoidance purposes b/c J did not retain indirect control over Corp. 302(c)(2)(A)(ii). not Jim-Bob to J. -So.
-b/c seen as involuntary. inheriting or getting shares by bequest does not dq SH for waiving Family Attribution rules. *remember no waiver if F actually owns stock. each related person agrees to be jointly and severally liable for any deficiency resulting from acquisitions (prohibited interest). 302(c)(2)(C) must be satisfied. that son won’t have to join in waiving family attribution and being jointly and severally liable. -that is Frances agrees to be J&S liable. AND 2. that is irrelevant. b/c not related person whose stock is attributed to F. which will be reattributed to her Estate. -so. if there is a son (sibling of 2 children) as bene also of Estate. -So. -Sec. having the entity (Estate) and each related person (F and 2 children) meet 3 req’s of 302(c)(2)(A). and it is satisfied by: 1.124 prohibited interest. Problem 7(a) -How many shares does H’s Estate own? -Estate owns all 100% of shares b/c F constructively owns shares by her children. . -So. *remember to be related party under 318. the only way Estate can qualify for 302(b)(3) is if it can waive family attribution rules. stock must be attributable to the person. -So.
125 Section 4: Distributions Not “Essentially Equivalent to a Dividend” -Sec. 1. . 1970) -Facts: -D owns 250 shares. -B (unrelated party) owns 500 shares. 318 attribution rules do apply to Sec. not as 302 exchange. Court held that a SH who owns 100% stock of Corp (either actually or constructively b/c of 318) will never qualify for 302(b)(1). Three Rights of SH: 1. -Issue: -Does redemption of 1k shares of preferred stock qualify for 302(b)(1)? -Holding: No. D’s wife owns 250 shares. there must be a meaningful reduction of SH’s proportionate interest in Corporation. but equity investment was better for business purposes. and D transfers those shares to his 2 children. Davis (S.302-2: Sec. -so. -a few years later. so D invests 25k and gets back 1k Preferred Stock (basis is 25 per share). needs more capital. -Court’s Holdings: 1. 1. -Then. Meaning treat that as a 301 distribution. redeems 1k shares of preferred stock for 25k cash. D acquires B’s shares. 302(b)(1) b/c 302(c)(1) says that 318 attribution rules do. Ct. and is if SH does not satisfy safe harbors of 302(b)(2) or 302(b)(3). (see also Reg. -Reg. 302(b)(1) is made without regard to Corp’s earnings and profits and without regard to whether 302(b)(3) or (b)(2) was not satisfied. 4. 2. Court held that to qualify for 302(b)(1). Corp. 302(b)(1) is facts and circumstances. Court held that Sec. Right to share in net assets on liquidation. Right to Vote. United States v. 3. -D could have given debt.302-2(b) that says attribution rules of 318 apply) 2. Right to share in Corp’s E&P. Court held that business purpose is irrelevant to applying 302(b)(1). -problem is court didn’t say what this meant. -Corp. -business purpose for redemption or business purpose for issuing of stock is irrelevant to 302(b)(1). 3. the meaningful reduction must be in one of these 3 rights.
53% (48/95) -b/c apply 318 attribution rules. Family Hostility Problem 1(a)(2) -SH’s can argue Family Hostility Exception to negate Sec. -so. 37) Problem 1(a)(1) -No.e. then determine if it is meaningful reduction according to Davis – look at facts and circumstances. Rul.126 -so look at each. -usually have to pass some control threshold. -3rd if there has been a reduction. -sole SH cannot ever qualify b/c always has sole right to vote. go below 50% voting power. -Cerone Case -1st apply the 318 family attribution rules. but after redemption A lost ability to control by aligning with one other SH. -So. -Benjamin said that voting control right outweighs other 2 rights. 302(b)(5) -says that fact that SH failed (b)(2) and (b)(3) is irrelevant to applying 302(b)(1). -2nd a determination is made whether there has been a reduction in SH’s proportionate interest in Corp. what is the argument? -argue that pursuant to Rev. the courts and IRS have focused on voting power reduction. 318 Family attribution rules. Reduction in Voting Power -courts focus on voting power. Sec. b/c -Pre: 53% -Post: 50. -i. -it is at this point and only then that family hostility becomes a factor. and B . -Rev. 76-364 that before redemption A had ability to control corp by aligning herself with any one other SH (except B). -Benjamin case held that reduction that left SH owning more than 50% voting power is not meaningful. -but if SH has voting right. Section 4 Problems (p. 77-218 says that reduction from 60% to 55% is not meaningful reduction b/c SH still retains voting control post reduction. Rul. -pro rata distributions (meaning same reduction to each SH) does not qualify. now A can’t get joint control unless she aligns herself with B.
127 and A are on bad terms. (especially considering joint control arguments) Minority SH’s Problem 1(d) -Yes b/c -Pre: 28% -Post: 22. get this by inference from Rev. 75-502 said that going below 50% voting control is meaningful. -BUT Rev. Patterson Trust (6th Cir. + there was no 2/3 vote imminent. Rul. SuperMajority (2/3 vote needed) What if SH loses super majority control? i. -Rev. -D.) held that loss of supermajority is meaningful reduction. 77-28 and Benjamin Case. So 2/3 imminent vote may make reduction meaningful? Problem 1(c) -No. -Wright (8th Cir. 7 said 57% to 50% is meaningful reduction where other 50% was held by single unrelated SH. Rul. this 50% post may not be meaningful reduction since 50% may represent effective control. from 70% to 55%? -Rickey case held that loss of supermajority is meaningful.47% (19 actually and 28 from A) -so. -so. -Pre: 52% -Post: 50%.e. this may not work in this case b/c 2 unrelated SH’s own other 50%. Rul. Rul. Problem 1(b) -Yes b/c -Pre: 53% (24 actually and 28 from A) -Post: 48.) held that loss of supermajority is meaningful. -Rev. Ct. So. A will argue that there is a meaningful reduction. -Roebling said that going from above 50% to below 50% voting control is meaningful reduction. but maybe yes. going below 50% voting power is a meaningful reduction. -Henry T. weak authority. 78-401 disagreed and held that loss of supermajority control is not meaningful since SH retains control over day to day operations. -so.58% = 21 / 93 .
46%. so any reduction (that is not pro rata) would be meaningful. 81-289 held that unchanged proportionate interest is not meaningful b/c redemption is essentially equivalent to dividend. one share redeemed would be meaningful. 76-364. Look to see if there is joint control pre. minority SH has no chance to control by aligning self with another minority SH – so no joint analysis.6% to 40. Rul. but post can’t align self with A to control so there is a meaningful reduction. and 1 share is redeemed? -Rev. redeems only 1 share from D? -NO. -thus. Problem 1(e) -Yes b/c -Pre: 23% -Post: 18.128 -b/c of Rev. Rul. 75-512 said that reduction from 30% to 24. Rul. meaning need loss of joint control. -so. that is only 49. What if Corp. then loss of joint control post.e.46% not 50+%. -so. Rul. -A’s 21 + B’s 25 = 46 / 93 = 49. -Now. -Johnson Trust held that reduction from 43. -A must align herself with 2 other SH’s to control Corp. Publicly Traded Stock -Rev. -Again use Rev.95% -NO Family Attribution (318) with siblings. look for proportionate reduction in voting power of de minimus SH. if A aligns self with B. 1 with 77 shares and 1 with 23.3% was meaningful where one other SH held 60% pre and post. Rul. -i. PROBLEM 2 SH Alonzo C/S 60 P/S 10 . -this is joint control analysis. -D could have had joint control by aligning himself only with A pre. 76-364 joint control analysis. -Rev.03% reduction was meaningful b/c that de minimus SH had no chance to control. 76-385 held that a . What if there are 2 SH’s.8% is not meaningful b/c there was no significant change in control of Corp. just look to see if there is joint control post with any one SH. so all are unrelated SH’s. -rationale is that there was one other SH who owned 10%. post D can have joint control with A. -so. -A cannot align herself with one other minority SH to control the Corp. post redemption.
-Corp. 85-106 extended rationale to joint control. redeemed NVS.if no common stock before or after redemption. redemption of non-voting p/s most likely meaningful (b) A would likely not qualify. right at liquidation) attached to preferred stock revert to the common SH’s b/c common stock is the residual interest -thus. no change in voting power. but has lost substantial amount of preferred shares (RR 85106) 302(b)(1) probably C – dividend probably not D Would likely still qualify based on above Non-Voting Stock (NVS) NVS and VS -if SH holds voting stock. -Corp. -Hay’s Case -SH owned all NVPS and 80% VCS. . then redemption of Non-voting stock qualifies as meaningful reduction.e. -SH C constructively owned 18% of Voting Stock and 2 other unrelated SH’s (B and A) each owned 19%. redeemed 10% of NVPS.129 Berta Colin Donna 25 15 0 55 15 20 (a) 5 p/s redeemed from D Probably meaningful RR 77-426 . held that this was not a meaningful reduction b/c rights (i. -Ct. and no common stock. SH recouped 80% of the rights he lost on 10% reduction in NVPS. could align self with B or A to control Corp. then yes probably qualifies for meaningful reduction when minority SH can’t control (jointly or otherwise). held that this was not meaningful b/c SH retained joint control. -Ct. Rul. and other SH’s owned rest (44%). moving forward he is proportionately in greater control dividend B no change in voting power. -Rev. Minority SH -NOTE: if it is minority SH. Only NVS -if SH holds only non-voting stock. then redemption of non-voting stock is not meaningful reduction. not losing control. and there is redemption of NVS.
-Sec. Sec. recognizes gain and loss. -And W recognizes gain under Sec. -this is unlike Sec. -But we have to deal with Split HP.9 million basis. -there is no req’t that this is legal dissolution and Corp. -SH’s Tax Consequences: -Sec. -Block 2: 200 shares with 1. paying SH’s. no tack. has 7. 336(a). 332 liquidation). distributes 6 million to W. are that of winding up in that Corp. -Block 2 represents 1/3 of W’s shares. -Fresh HP. so 2/3 of 6 mil. recognizes gain or loss on complete liquidation. -Special Rules in case of liquidation of subsidiary (Sec. 336(a) corp. So gain or loss is recognized under Sec. 331(a) says that liquidation distribution is payment received for SH’s stock. – AB: 50k = 3. 77-426 held that redemption of NVPS where SH only owns NVPS is a meaningful reduction. distribution is allocated to Block 1. treated as sale of Stock to the Corporation.4 million E&P and Corp. General and Special Rules are premised on a Complete Liquidation.130 -Rev. Chapter 8: Corporate Liquidations -General Rules -Corporation’s Tax Consequences determined under Sec. is paying off debts. 1001. -What are tax consequences? -Corp. etc. 1001. -We do this by allocating AR based on number of shares. under state law. -Reg. LTCG property. 336 -Sec.000 LTCG. -Corp. and (2) the activities off Corp. STCG property. Problem 1(a) -W has 2 blocks of stock: -Block 1: 400 shares with 50k basis. -AR: 4 mil. -RA: -Block 1 represents 2/3 of W’s shares.332-2(c) says that liquidation is: -(1) Corp.950. is allowed to retain nominal assets to retain legal status as Corp. . 1. ceases to be a going concern. 311(a) where loss is not allowed. Rul. 334(a) SH takes a FMV basis in property.
9 million.950. there is a 3 prong test -distribution is not liquidation unless 1.000 LTCG = AR: 2 mil. the Corp’s activities must be directed to such termination. -Ct. Problem 1(c) -liquidation is allowed if there is a plan. distributes 300k to W in complete liquidation. -these E&P disappear and the SH gets Capital Gain treatment on liquidating distribution. we go distribution by distribution: -Distribution 1 of 3 million: -Block 1: 1. 331(a) . there must be a continuing purpose to terminate corporate affairs 3. entered into leasing and royalty relationships with its assets. said that status of liquidation did not exist in 1960 b/c Corp was not in process of liquidating b/c Corp. in problem. and is allowed to take time over a couple of years. -W’s Tax Conseq: -Sec.Sec. -BUT if there is no formal adoption of plan. Olmstead -adoption of plan. we need to know whether Corp. 2. stopped historic business and sold its essential assets. = 100k STCG.9 mil. -so Corp. Problem 1(b) -Corp. – AB: 1. there is a manifest intention to liquidated. but Ct. .8 million STCL = AR: 100k – AB: 1. stopped engaging in in historic business and was conducting in business just to wind up. was still engaging in historic business activity. -plus fact that delay was for marketability of assets and short time frame helps prove that it was liquidation. -What about Corp’s E&P? -they are not relevant. has E&P deficit. -adoption of the plan is necessary. – AB: 50k. was still receiving income. 1001 gain -Block 1: 150k LTCG = AR: 200k – AB: 50k. – AB: 1. 1001(c) and is not disallowed by Sec. -Block 2: 900k remaining AB = AR: 1 mil. -So. then distribution in 1960. but then Corp. *Loss can’t be recognized until complete liquidation is final. 267(a)(1) b/c 267(a)(1) says that complete liquidation is exception to 267.131 -AR: 2 mil. McGuire -adoption of plan in 1934. -again the E&P deficit is irrelevant. -so Corp. said Corp. -Block 2: 1.9 mil. -If this is complete liquidation. had difficult time finding buyer. -this STCL is allowed by Sec. Then Corp. -remember 267 disallows loss to a more than 50% SH.
What about tax liability? Let’s say Corp. then Steve would have to pay it. so SH’s tax consequences will be same as above. -Corp’s Tax Consequences: -Sec. Sec. then 1239 could apply b/c building is depreciable in Steve’s hands and Steve owns more than 50% of stock. See Rev. 336(a) treat as sale at FMV to SH. -Steve: -Gain: 5 million = AR Net FMV: (10 mil – 4 mil = 6 mil) – AB: 1 mil.5 million: -Block 1: 1 million LTCG = AR: 1 mil – AB: 0 b/c all was taken by Dist1 -Block 2: 400k STCL = AR: 500k – AB: 900k. -if SA is building. sells assets then distributes cash.132 -Distribution 2 of 1. SH is treated as assuming recourse and taking property subject to nonrecourse debt. 331(a) says treat as 1001 transaction. distributes Swampacre to Steve (Steve’s AB in Stock = 1 million). distributes all assets or when Corp. -fresh HP in SA. Problem 2(a) -Corp. -Gain: 7 million = AR: 10 million FMV – AB: 3 million. -Steve’s Tax Coneq: -Sec. Sec. -this would reduce Steve’s amount gained. -NOTE: liquidation can be when Corp. 7 million gain. 334(a) says basis = FMV of property. -Net FMV = (FMV of Property less Liability Assumed) less AB of Stock. -we would net AR for Steve (FMV – Liability) -BUT we don’t do anything different for Corp. -SA has FMV of 10 million and AB of 3 million. -disregard liability for Basis. -Under State law. -Character of Gain is probably 1231 gain. -Character is LTCG. -Basis: 10 million. did not pay tax liability. Rul. *Liability assumed by SH is a cost of acquiring property. 334(a) and Ford Case. . Encumbered Property: Liability Assumed by SH Problem 2(b) -Corp: -same as above. -Basis is still 10 million. 59-228. -Gain: 9 million = AR: 10 mil – AB: 1 mil.
-the gain inherent in the stock disappears. -this is similar to 243 DRD. then Sec. 332(b) 1. and Tucker owns the other 20 of Specific. . -Basis is transferred Basis: 9 million. -Specific liquidates and distributes Factory with FMV of 20 million and AB of 9 million to Global. does not recognize g/l when it distributes asset to 80% SH. -EX: Plan adopted in Yr. Exclude NVPS.133 Section 332 Liquidation -Sec. 2-OR if all liquidation distributions don’t take place in single taxable year. -we’re trying to prevent 2 levels of Corporate Tax. owns 80% of Corp’s Total Voting Power and own a value = to at least 80% of Corp. -IF timing or control fail at anytime. -remember go from 1st distribution not adoption. 2. 332(a). then all distributions in Year 2. Sec. 1. -go from 1st distribution. 332 liquidation b/c control and timing are satisfied. -this control req’t must be satisfied at adoption and throughout liquidation. the distributions take place pursuant to a plan. Sec. Specific: -so. -HP tacks. E&P. then final distribution is made in Year 5. Timing Requirement 1-all liquidation distributions take place in a single taxable year. and thus use general rules of liquidation. 337(a) there is no gain b/c the liquidating corp. Also. 1. -so gain inherent in factory is preserved. Sec. 1223. and the last distribution occurs within 3 years of the taxable year in which the 1st distribution is made. (general rules are above. Sec. net NOL and other stuff carries over to 80% Parent. -EX: Plan adopted in Yr. -this is a Sec. 334(b). 332 fails. Control Requirement -Parent/Control Corp. then 1st distribution in Year 2. under Sec. 1504(a)(2). Problem 1(a) -Global owns 80 shares of Specific. Global: -recognizes no gain.
may not recognize that loss. 334(a) transferred basis. when there is a 332 liquidation and Corp. Tucker -Gain: 3 million = AR: 5 million – AB: 2 million. but Specific would recognize gain. -but this may not be that great b/c Global would recognize loss.134 What about distribution to Tucker? -a distribution to a minority SH is governed by General Rules (above). BUT if transferred asset to Minority SH? -Then under Sec. is distributing it to SH. . Problem 1(b) -the answer would not change to Global and Specific. -the loss inherent in the stock disappears. Sec. -there may be an incentive to fail 332 to recognize the loss. -Congress was concerned that Corp’s would pick and choose assets it would distribute to each SH. -Result: Specific -Gain: 1 million = AR: 5 mil – AB: 4 mil. Problem 1(c) -Global would take transferred basis in Factory = to 30 mil. 336(d)(3) loss is not recognized by Distributing Corp. -AND the minority SH takes a FMV basis in property after recognizing gain even when Corp.
2nd apply 302(b)(2). 3rd apply 302(b)(1). Meaningful Reduction -going from above 50% to below 50% is meaningful. 311 always applies whether it is a 302 or 301 when Corp. then red. -looks like Firm and Fixed Plan under 302(b)(3) is more strict than 302(b)(2) plan test. can’t satisfy. *on exam stop at the 302(b) test when it is satisfied. approach the 302(b) Tests as follows: 1. 3. 1st apply 302(b)(3).. -yes for red.135 Summary of Chapter 6 -For Corporation: Sec. distributes property to SH. -if SH owns no voting. For Exam. Fix 10 year look back rule about rule not applying if transferred stock is redeemed from transferee in same transaction. -but going from above 50% to staying above 50% is meaningful only when there is supermajority (in 6th and 8th Cir. Series of Redemptions for 302(b)(2) -302(b)(2)(D): each satisfies on own. 2. 302(b)(2) -never for red. Waiver of Family Attribution -exception is only inheritance or bequest (meaning from Decedent) NOT gift from living. of NV stock. -Minority SH -if there is one majority SH. -Rule for S Corporation is rule for when S Corp is Redeeming SH. -Non-Voting Stock -if SH owns Voting Stock. -remember IRS can still apply general steps transaction doctrine to series that is not same as 302(b)(2)(D). then yes satisfy for any redemption of non-voting. but not according to IRS). but in aggregate it fails b/c retains control. is meaningful reduction. -also to reduced from 60% to 50% where other 50% is held by one unrelated SH. . of PVS if own no Common stock.
AND only recognize loss after last distr. -1st treated as recovery of basis. 1st allocate 301 out of current E&P 2. -IF not 302. and why is there a delay? Good reason for delay or not? -1239 and 1245 can apply for characterization of Corp’s gain. Summary of Chapter 8 -rules only apply when there is Complete Liquidation.. -relevant facts are what assets have been distributed v. and basis of redeemed is transferred to remaining shares. -Formula: Basis Left = Basis in Remaining Shares – Basis of Redeemed Shares. then is 301. go block by block. . distr. then Stock Basis in remaining shares is decreased by the AB of shares redeemed. assets retained and whether Corp.136 IF it is a 302 redemption. -this Acc. -if SH receives series of liq. Allocating E&P 1. 2nd allocate Accumulated E&P to 301 and 302 in chronological order. E&P includes any Excess Current E&P attributable at time of 302. still has historic business going. then rest is treated as capital gain.
but there are key differences. a SH’s spouse or former spouse is included as Member of Family. 99-43 said that this is ok. -when S Corp distributes property or cash. and children are all treated as 1 SH. -EX: Corp. A. Great-Great-Great-Great Grandparent is as far back as you can go (Quadruple Great Grandparent) for a common ancestor. -S Corp is treated as a pass-through entity (income taxed once). -whereas Subchapter C is less complex and less flexible. and groups all members of family as a single SH. Rul. -taxed 1st at corporate level then 2nd taxed at SH level. -Also. Sec. 1361(c)(1) groups Husband and Wife as single SH. 1361(c)(1). not an ineligible corporation. has 99 unrelated SH’s. Difference b/t C Corp and S Corp: -C Corp is under double taxation system. -Sec. A and B are 1 SH. -this is modeled after Subchapter K. 2. Requirements of S Corp: -entity is a ”small business corporation” under Sec. -Subchapter K is more flexible and offers more tax advantages. 1361(b)(2)) 3. A and B are treated as family member b/c 2 generations removed from common ancestor (Grandparent). -EX: What if A’s child and B’s child are SH’s. -Member of Family includes common ancestor 6 generations removed lineal descendants. that is untaxed. and won’t combine both S Corp’s together.137 Chapter 9: S Corporations -eligible entities electing to be treated as S Corporation. meaning has 5 elements: 1. the H&W rule gets consumed by Member of Family rule. Thus. 1371(a) says that rules in Subchapter C apply to S Corp unless Subchapter S states otherwise or not fit with purpose of Subchapter S. Thus. 100 Shareholder Limit. (Sec. Rev. Purpose of Subchapter S: to allow business to be formed as Corp without significant tax consequences. Then same result. . and A and B who are 1st cousins. -meaning S Corp SH’s report and pay taxes. domestic corporation. -So. -Sec. b/c now there are 3 generations removed from common ancestor. So. B. 1361(a). -2 100 SH S Corp’s could each be a partner in a P-ship.
so yes 100 SH is satisfied. 4.” -Reg’s say that H&W cease to be single SH at divorce. Problem 1(b) -Parent and Child are members of a family under 1361(c)(1)(A)(ii) so yes satisfied. Problem 1(a) -Husband and wife are treated as a single SH under 1361(c)(1)(A)(i). . 1361(b)(1)(A) limits S Corp to having 100 SH’s. then probably not 1 SH but then got the definition under Members of Family that includes “former spouse. 5. -thus 100 SH limit is satisfied. therefore 100 SH limit is satified. No ineligible SH. -Partnership (including LLC treated as P-ship) can’t be SH. Problem 1(c)(3) -now we have 101 SH’s.138 -Purpose of 100 SH is for more simple administration of S Corp. so 100 SH limit is not satisfied. *if H&W get divorced. -C Corp / S Corp generally cannot be a SH of S Corp. -these 2 cousins are treated as 1 SH b/c are Members of Family b/c there are 3 generations removed. Sec. Problem 1(c)(2) -Great Great Great Great Grandparent is exactly 6 generations removed. -Exception is that a S Corp can own 100% subsidiary S Corp (QSub). -SH must be an individual and not a non-resident alien as SH. -may have classes of stock with different voting rights. -So each family is treated as 1 SH. thus have 99 SH’s. -but a single owner LLC can be SH b/c LLC is a disregarded entity as long as owner of LLC is an eligible SH. Problem 1(c)(1) -2 cousins whose grandmothers were sisters.One class of stock required.
makes election by 15th day of 3rd month of current year. Problem 1(b) -one class. so ok.139 Problem 1(e) -no b/c SH must be an individual. -meaning no period of C Corp status during 2 and ½ months. Problem 1(c) -no b/c 2 classes of stock. Timing of Election -generally election makes entity an S Corp at start of next taxable year. then may classify as S Corp for that current year.1361-1(e)(1) says that partnership may not be a SH of S Corp. How is election of S Corp made? -all SH’s must consent to election of S Corp. 1361(b)(1)(B). so election must be made by May 15 for the election to be effective as of March 1. Sec. Problem 1(a)(1) -retroactive election is allowed if Corp.1361-1(l) may have different voting rights among stock. 1. What about reclassifying debt as stock? -there is risk that debt classified as stock = 2 classes of stock. One Class of Stock Req’t Problem 1(a) -Reg. -if make election after May 15. Preferred and common. -here S Corp was created on March 1. say that one class of stock means all stock must give same rights to right to profits (distribution proceeds) and liquidation proceeds. -can’t have common and preferred. -so b/c have common and preferred. (retroactive application of election). -if make election on the 15th day on the 3rd month of the current year. -if have H&W. each must consent for election to be valid. then election is triggered on January 1 of the next taxable year. 1. -1361(c)(5) Straight Debt safe harbor (not tested) Election of S Corp. . -Reg. -requires that Corp qualify as S Corp (5 elements) during whole year and that all SH’s consent. this fails. -Reg.
no election to 2007. and sale occurs. still new SH need not consent b/c election was valid with all SH’s consent on May 30. -meaning can’t make election till after F sells stock to D and E. F. -after an election has been made. F sells stock to D and E. . still get retroactive status (current year). E.140 -even if delay. then F must consent to S Corp election b/c req. Problem 1(b) -Corp is owned by D. Problem 1(a)(3) 1------------------------------1---------------------------------------1----------------------------March 1 March 5 Election May 15 (retroactive effect) -once election is made. All SH’s at time of that portion of year consent to election. F is non-resident alien. -WHAT if Election is made on May 30 and sale occurs on June 15? -that is ok. -So a 2008 election may be made anytime b/t 2-2-07 to 3-15-2008. -For 2008 S Corp Election: -F may not consent to election b/c F is non-resident alien. -So. subsequent sells or changes in SH’s has no affect on valid election. -Retroactive Election is only allowed if Corp satisfied all S Corp req’s on everyday of portion of year preceding election date.’s for retroactive election is: 1. AND 2. -IF F is not resident alien. will that be retroactive? -NO. 2007. then if there was reasonable cause for late election. satisfy all S Corp req’s for portion of year preceding election date. -on Feb. new SH’s are not req’d to consent. 1. -If make election in 2007.
-Methods to End S Corp Status: 1. Problem 1(c) -under Sec. 1362(e). and new taxable year begins on date after date of revocation. -if want election for current year. Sec. Sec. -EX: revocation occurs in Year 1. one reflecting S Corp Short Year and one reflecting C Corp Short year. then revocation is effective as of 1st day of following taxable year. the entity must wait 5 taxable years to file new election from year of revocation. that majority SH’s make revocation. when an S Corp election is terminated. (50% +) -whether voting or non-voting stock. Sec. -EX: 1--------------------------------------------1----------------------------------------1 (S Short Year) 7/1 issues ps (C Short Year) -So. just look at outstanding stock. -can have retroactive revocation if make election before 15th day of third month of taxable year. thus have retroactive revocation. -req. -if no definite date of revocation. -this revocation is effective on date that S Corp fails to satisfy SBC. thus new election can be made in year 6. have Short S Corp year and Short C Corp year. Problem 1(b) -revocation can occur before 15th day of 3rd month if state definite date of revocation. Sec. -revocation requires majority of outstanding shares. (failing to satisfy S Corp) Sec. Ceasing to be a Small Business Corp. -usually when more than 50% of stock is held by persons who were not SH’s at . Voluntary Revocation by SH’s. 1362(d)(1). must file 2 returns. then make revocation occur before 15th day of 3rd month. whether voting or non-voting.141 Revocation or Termination of S Corp Status -an S Corp Election is effective until it is revoke or terminated. Problem 1(a) -Voluntary Revocation by Majority SH’s. then revocation is effective on or after date of revocation. 1362(g). 1362(d)(1). -IRS can consent to earlier filing of new S Corp Election. 1362(e). -or can revoke at anytime thereafter without definite date. 1362(d)(2). -meaning need G and one other SH to consent. 2. -if this termination occurs within taxable year. -if definite date. must allocate to each.
i. IRS determines that disqualification was inadvertent 2. Henry Associates v. Rul. and consented by any new SH (meaning SH who came into Corp post decision to revoke). -Sec. -if Kate did consent. if: 1. but unsure.142 date of revocation/termination. -if Kate did not consent. 86-110 has same facts and says this is an inadvertent termination. T. Com’r (Tax Court) -to prevent this.e. then can’t rescind without Kate. majority SH has right of first refusal to buy any shares. 1362(f) gives IRS authority to overlook inadvertent termination. 3. 1. 1. then can rescind without Kate. then attempted transfer does not terminate election.J. -So the question is whether Kate consented to revocation on July 1. 1362(f) may apply. Reg. -if void. whether or not the S Corp distributes the cash. -Rev. the Corp and each SH agree to such adjustments as the Commissioner may prescribe. Reg. the Corp and/or SH’s take steps to remedy the disqualifying event without a reasonable period after discovery. -or IRS allows early election b/c event causing termination was not within Corp’s control or SH’s having substantial interest in Corp were not part of plan to terminate the lection. the S Corp needs limits in shareholders agreement. -so now the Corp and SH must remedy this by correcting the trust. Minority SH Terminating S Corp Election Problem 3 -a minority SH may want to terminate an S Corp Election b/c minority SH is taxed on share of income. Inadvertent Termination Problem 2 -Sec.1362-2(a)(4).1362-5(a). -Rule: a minority SH may intentionally terminate an S Corp election without the consent of majority SH’s. . Problem 1(d) -a voluntary revocation may be rescinded as long as rescission occurs before date the revocation is to be effective AND if rescission is consented by every SH who consented to the revocation. -if voidable. then attempted transfer terminates S Corp Election.
-SH does 1231 hotchpot. 1363(a) -but S Corp is a tax accounting entity. Sec. Sec. so SH must apply 179 exp rec’d from s Corp against other 179 exp’s. Income DVD Rental Receipts Tax Exempt Interest Separately Stated Item 198k 6k Yes. STCG 30k but don’t net against LTCL. Yes. so no potential limitations. -and misc. Sec. 1231 Gain 36k STCG Expenditures/ Losses Salaries Sec. Not separately stated. 179 expense b/c there are limitations under 179 that apply at the individual level. Yes. -AND S Corp is to net LTCG with LTCL. -focusing on rules of S Corp that has always been an S Corp. Yes. Effect of Subchapter S Election by Corp with No C Corp History. -meaning income and loss is computed at the corporate level . 1363(b). -Rule: take into account separately if could affect the SH’s liability for that taxable year. Not separately stated. -so if dollar limitation applies at individual level.143 Section 3. Not separately stated. 1231 gain of 36k -S Corp is to net 1231 gain with 1231 losses. Problem 1(a) -A owns 100 shares with basis of 20k. -see Reg. LTCL (18k) Yes. (there is a dollar limit under 179. separately stated b/c non-deductible expense. stated. -B owns 50 shares with basis of 22k. *this is business interest. exp. that item must be sep. -another example is investment int.1336-1(a)(2) generally. -S Corp is not subject to income tax. 179 Expenses 30k 62k 15k Depreciation Rent Interest Expense (on loan to purchase DVDs) LTCL Lobbying Expense 9k 40k 12k 18k 12k Yes. Tax Exempt Interest 6k -each SH takes pro rata share and takes tax exempt status in own tax return. itemized deductions. -SH nets at individual level. 1.
itemized deduction. or credits are separately stated if they could affect the liability for tax of any SH. NOTE: 1245 Gain is not separately stated. lobbying exp** Non-Sep Stated 75k 50k 25k Computed Income*** *SH is to take pro rata share of sep stated items and non-sep. Non. 1366(a)(1). Sec. 1366(b): Tax Character of item is determined at the Corporate level. 1366(a)(1)(B) determine income or loss. there is no double taxation for S Corp. -same with misc. with certain items being separately stated. which is non-separately stated item. Sec. -Sec. ***this is a net figure.144 -i. and with exceptions: -personal exemption under 151 is not allowed. And see Reg. Sec. 6k 4k 2k 1231 Gain 36k 24k 12k STCG 30k 20k 10k LTCL (18k) (12k) (6k) 179 Exp (15k) (10k) (5k) Non-cap. -this makes sense b/c 243 DRD is to mitigate affect of double taxation system. -limit of charitable contribution is not determined at corporate level. then it is part of bottom line number. deductions. this is Ordinary income or loss. lump 1245 gain into non-separately stated computed income/loss. those are passed through to SH’s. Sep. 1366(a)(1)(A): -which says that items of income. And that character flows through to SH’s.(12k) (8k) (4k) ded. S Corp makes the elections. Sec. 1363(c). **separately state b/c this affects stock basis of SH. 1363(b) says that taxable income of S Corp is generally determined in same manner as individual. 1. 1363(b). Separately State Items listed in Sec. Sec. IF not separately stated. . stated computed income. that excludes all separately stated items.e. it is determined at individual level. Stated A (2/3)* B (1/3) Items Tax Exempt Int.1366-1(a)(1). loss. What if S Corp receives dividends? -gets no 243 DRD b/c S Corp’s computation of income is determined as individual.
This is b/c FMV of stock increases b/c of tax exempt income. (B). Increase Basis -1367(a)(1)(A). Adjustment of Stock Basis Rules . Increase by tax exempt income so that SH is not taxed on that amount upon distribution of stock. 1. Reg. -NOTE: SH has right to change order of last 2 items. 1367(a)(2)(B) Net Increase Ending Stock Basis A 20k + 98k (8k) (22k) 68k 88k B 22k + 49k (4k) (11k) 56k 56k NOTE: rules for formation of S Corporation are same as for C Corporation. Sec. -this comes into play more when there are distributions and when there is loss limitation by 1366(d). 1367(a)(2)(A). 1. 3. . -SH must pay taxes on pro-rate share.1367-1(f) Ordering Rule: 1. 4. 2. Dividends pass thru as Qualified Dividends 1(h) rate. Problem 1(b) What about the SH’s basis: Starting Stock Basis 1. -so this goes to allocating income items to A and B in problem above. -this prevents us form having to do SEE (that is something apart from tax liability). (C).1367-1(g) Election. Decrease Basis 3. Sec. 1367(a)(2)(B). Decrease stock by separately stated loss items and non-separately stated computed loss item. then 2nd decrease by non-deductible non-capital loss items. we just allocate the amounts to SH’s on last day of taxable year. (B) 2. Per-Share Per-Day Rule -when there is no change in ownership during year. so increase stock basis to reflect value attributable to tax exempt income does not result in a gain. 1367(a)(2)(D).Reg. Sec. 1367(a)(2)(D) 4. -So. Decrease stock basis by tax-free distributions.145 -Also. 1367(a)(1)(A). regardless of whether SH rec’d distribution. Increase stock basis by separately stated income (including tax exempt income) and increase by non-separately computed income item. Decrease stock by non-capital non-deductible expenses. a. This is to prevent SH from benefiting from the non-deductible expense. that is 1st decrease by tax loss items. Sec. -adjustments are taken into account at end of taxable year. Qualified Dividend must be separately stated. -b/c no special allocations allowed. a.
-you pro rate this b/t 2 different losses. NOTE: under Subchapter K. 1367(b)(2)(A) Debt Basis Reduction -reduce Debt Basis by excess loss over stock basis (Loss – Stock). 1366(d) Special Rules for Losses and Deductions -Loss Limit: deduction taken by SH can’t exceed sum of: 1. -meaning for Dean’s 10k loss: -8k is non-sep. -stock basis has been reduced to zero. 1367(a)(2)(C) stock basis decrease 1367(b)(2)(A) reduce debt basis by excess amount of unused loss of stock basis Ending Stock Basis Ending Debt Basis C 6k 7k (10k) 13k b/c is sum of stock basis + debt basis. 16k is non-sep. -SH under S Corp only takes into account his debt to p-ship. (6k) 0 Sec. -1200 is STCL -of the 4k carry forward loss: -3200 non-sep. What about Character? -let’s say that of 20k. -800 STCL . stated and 4k is STCL.146 Problem 2(a)(1) Starting Stock Basis (1/1/06) Starting Debt Basis (7/1/06) Non-Sep Computed Loss (20k) 1366(d) Loss Limit Loss currently taken 1366(d)(2) Carryover of Disallowed Loss (indefinitely) -suspend loss. AB of stock. (10k) 0 (6k) b/c is limited to reducing stock basis (4k) 0 3k D 6k (10k) 6k 6k (b/c of 1366(d)) 4k loss carried over to future years. partner includes share of p-ship’s liability. AB of debt (that is Debt owed by S Corp to SH). computed loss (16/20 * 10k) -2k is STCL (4/20 * 10k) -of the 6k current ded: -4800 is non-sep. 2.
1366-2(a)(5). its basis is adjusted immediately before repayment. Sec. under 1041.1366-2(d)(1) adjustments to basis are made at the close of S Corp’s taxable year (calendar year Dec. -stated differently: if a debt is repaid in whole or in part before the close of the taxable year. Reg. 1. 1. Ending Stock Basis Ending Debt Basis C 0 3k 6k D 0 6k +6k 6k (4k) ordinary loss. Reg. 1366(d)(2).1366-2(d)(1). 1. carried forward loss does not get reduced when SH partially sells stock. then carried forward loss disappears. 2nd use excess net increase to increase stock basis. -if complete transfer of stock.1366-2(a)(5)(ii). Net increase: 6k Debt + 4k Stock + 2k 2k 7k 2k Restoration of Basis: 1st use net increase to increase Debt Basis (restore up to Debt Basis). 1. 1367(b)(2)(B). the carried loss is transferred over to spouse. Sec. 31) but if debt is repaid during year. Problem 2(a)(2) -then C has same result as D b/c C no longer has any debt basis since S Corp has paid it. -the carried forward loss (suspended loss) is personal to SH and does not get transferred to new SH. Problem 2(b)(1) Starting Stock Basis (1/1/07) Starting Debt Basis (7/1/07) Non-Sep Computed Income 12k 1367(a)(1)(B) stock basis increase 1366 Loss Limit Amount Carryover Loss taken into account Restoration of Debt Basis: 1st use net increase to increase Debt Basis (restore up to Debt Basis) 1367(b)(2)(B). 1366(d)(2)(B) and Reg. Reg. -IF it is a complete transfer of all S Corp stock b/t spouses. -also. the basis of the debt is restored (that is increase by income item) effective immediately before the first repayment of debt during the taxable year. .147 Carryover Loss What if D (SH) transfers or sells stock with carryover loss. 1367(a)(2) (A).
In my hypothetical.148 2nd use excess net increase to increase stock basis. Explanation: When a SH’s debt basis was reduced in a prior year.000. that 4k “gain” is used to increase SH’s stock basis. Since the entire net increase was used to restore Chantal’s debt basis.** Stock – 4k (amount that is allocable to decrease). Her stock basis is increased . Stated Capital Loss 8k (4k) 1367(a)(1)(B) stock basis increase 1366 Loss Limit Amount Carryover Loss taken into account Restoration of Basis: Net increase: 2k = 6k st 1 use net increase to increase income – 4k CL Debt Basis (restore up to Debt Debt + 2k Basis) 1367(b)(2)(B). The remaining stock basis adjustments simply offset each other. leaving her with a 0 stock basis. since there is a net increase of 2. 2nd there is a 1367(a)(1)(B) stock Stock + 4k basis increase of 4k. What if there is a separately stated Capital Loss of 8k? (focus on C) C D Starting Stock Basis (1/1/07) 0 Starting Debt Basis (7/1/07) 3k Non-Sep Computed Income 12k 6k Sep. Ending Stock Basis 0 Ending Debt Basis 5k **showing that we need to go through all steps on exam. Chantal’s net increase for 2007 is 2. -EX: AB in Debt is 3k.000. 1367(b)(2)(B) says that any “net increase” for the current year is first applied to restore the prior reduction in the SH’s debt basis. 2. A SH’s “net increase” is the amount by which the SH’s pro rata share of the items described in 1367(a)(1) (income items) exceeds the SH’s pro rata share of the items described in 1367(a)(2) (loss/ded items) for the year. there is no net increase to her stock basis for the year. Thus.000 of Chantal’s pro rata share of the nonseparately computed income is used to restore her debt basis. In other words. then complete debt is repaid (that is 7k). 1367(a)(2)(A).000. ** (amount left of 3rd there is a 1367(a)(2)(B) stock income) basis decrease of 4k. What if debt 7k is repaid during year when SH has 3k debt basis? -then take that adjustment during year. so her debt basis is increased to 5.
000 45. 1377(a) provides that each SH’s pro rata share of an S Corp’s items passed through under 1366 is determined on a day-by-day.000 x 3.000 135. the portion that was not used to restore her debt basis).33 (rounded) Erin held 25 shares whole year.000 .000 / 360 days / 100 shares = 3. Ordinary Income Erin’s pro rata share: 25 shares (retained) 25 shares (sold on 6/30) Total Gabrielle’s pro rata share: 25 shares x 10 x 360 days = 90.000 x 3.000 The per day. This represents her share of the separately stated capital loss.1368-1(g) election to close the books Sec. Per Day: Nonseparately computed income (ordinary income) = 360.000 / 360 days / 100 shares = 10 Separately stated § 1231 loss = 120. and 25 shares for ½ the year. -when there is stock ownership change.000 The per day. -so do the following (in that you’re allocating items to shares sold and shares retained). Per Share. per-day.33 x 180 days = 15. Normal Method Problem 3(a) No Reg.000 under 1367(a)(1)(B). per share amount = 360..000 § 1231 loss x 3.e.149 by 4.33 x 180 days = 15. -NOTE: that Felix would have been allocated 50% of tax items regardless of whether election is made.000 x 10 x 180 days = 45. This represents the rest of her pro rata share of the nonseparately computed income (i. Point is that you have to do 1367 ordering in determining basis adjustments.000 under 1367(a)(2)(B).33 x 360 days = 30.000 x 10 x 180 days = 45. have to take that into account in determining pro rata share for year. Her stock basis is also decreased by 4. -this is the per-share. 1. b/c she sold those 25 shares on June 30. per share amount = 120. share by share method if the ownership of shares changes during the year.
000 (1012 Cost) (15.000) Ending basis (as of December 31) 130.000) 210. § 1367(a)(2)(B) basis decrease -attributable to 180 days. See § 1. (meaning. divide starting basis by 2 (or w/e) to determine basis to determine g/l in 1001: AR .000 180. Erin’s ending basis (as of June 30) 70.AB) Erin’s starting basis § 1367(a)(1)(B) basis increase -attributable to 180 days.000 **For Erin.000 Erin’s gain on the sale is computed as follows: Amount realized (sales price) Adjusted basis Capital gain The remaining basis adjustments take effect at the end of the year.1367-1(d)(1).1367-1(d)(1). use the allocations for all 360 days. -attributable to 360 days.000) 80.000** 45. Gabrielle 180.000 (share of non-sep income) (15.000) (share of 1231 loss) 100. 1.000 (100. Erin Starting basis 70. See § 1.000 § 1367(a)(2)(B) basis decrease (30. .1368-1(g).000* = (140k / 2) 45. Items are allocated as if the corporation’s taxable year consisted of two short taxable years.000* § 1367(a)(1)(B) basis increase 90.150 The basis adjustments with respect to the 25 shares that Erin sold to Gabrielle take effect immediately before the sale.000 Closing of the Books Method Problem 3(b) Closing-of-the-books election under Reg.
the corporation has nonseparately computed income (ordinary income) of 90. -G is only SH for ½ year and is 25% SH. -other qualified dispositions are in defined in Reg.1367-1(d)(3). See § 1. 2-For the hypothetical short year that runs from July 1 through December 31.000.1368-1(g)(1). We allocate tax items for short year as though tax year ends on date of sale. so use 50% to determine amount of tax items. June 30 basis adjustments: Erin’s starting basis § 1367(a)(1)(B) basis increase § 1367(a)(2)(B) basis decrease Erin’s ending basis (as of June 30) 140. Basis adjustments are also made as if the corporation’s taxable year consisted of two short taxable years.000 45.500 = 25% of 270k.1368-1(g). 1.500 Erin’s gain on the sale is computed as follows: . use Full basis for starting basis for making adjustments.000. 1st we have a Qualifying Disposition b/c: -When single SH sells at least 20% or more of total outstanding stock during any 30 day period during corp’s taxable year.* = 62.000 67.000 (60. the corporation has nonseparately computed income (ordinary income) of 270.000 and a separately stated § 1231 loss of 120.500 § 1231 loss 60. 2 Hypo Short years: 1-For the hypothetical short year that runs from January 1 through June 30.500 112.000 60. 31. so allocate 25% of tax items for that period. Meaning.000) 125. -allocate using pro rata share. and then divide by 2 (or w/e) before determining capital g/l in 1001: AR – AB. See § 1.151 the first of which runs from January 1 through June 30 and the second of which runs from July 1 through December 31. 1 to June 30. Ordinary Income Erin’s pro rata share: January 1 – June 30 (50%) July 1 – December 31 (25%) Total 45. Gabrielle’s pro rata share: Ordinary Income July 1 – December 31 (25%) 67.000 then divide by 2 for AB in below.000 -Erin owned 50% of stock from Jan. Remember all SH’s must consent to use this method. -then Erin owned 25% from July 1 to Dec.
.500). If the election is not made.500*) Capital gain 117. Erin is allocated 37.000 of ordinary income and 45.500 130. If the election is made. on a net basis.500 247.500 Election Made E 112.500 more income if the election is made. Gabrielle is allocated 67.500 -use 62.000).000 of § 1231 loss for the year (for total net income of 90.500 117.000 (1012) 67.000 of § 1231 loss for the year (for total net income of 30. on a net basis.500 Note: Erin is better off if the election is made. Gabrielle also ends up with 37. Erin also recognizes 37.500 more gain on the sale to Gabrielle if the election is made. If the election is made.152 Amount realized (sales price) 180. Erin is allocated 112.500 of additional stock basis at the end of the year if the election is made (which will eventually give Gabrielle 37.500 less gain or more loss).500 130k G 67. Therefore. Therefore.000 Adjusted basis (in 25 shares) (62. December 31 basis adjustments: Starting basis (as of July 1) § 1367(a)(1)(B) basis increase Ending basis (as of December 31) Compare With Election to Without Election: Election NOT made E OI (non-sep) 135k 1231 loss (45k) Net Income 90k Capital Gain 80k Ending Basis 130k G 45k (15k) 30k 210k Erin Gabrielle 62. Gabrielle is worse off if the election is made. **To resolve this dilemma.500 of ordinary income and no § 1231 loss for the year. Gabrielle is allocated 45. but Erin is still better off because of character and tax rate differences (assuming Erin held the shares sold to Gabrielle for more than 1 year). but Gabrielle is still worse off because of timing and character differences.000).000 247.500 (60k) 52.000 of § 1231 loss for the year (for total net income of 52. -E sold ½ her stock. Gabrielle is allocated 37.500 b/c that is E’s basis in shares sold to G.500 67.500 67. Erin is allocated 135.500 less income if the election is made. ½ of 125k. If the election is not made.500 of ordinary income and 60.500* 180. this needs to be decided on whether to make election at time of sale.000 of ordinary income and 15.
000. Amy is a dealer in real estate and held the land for sale to customers in the ordinary course of business. then use OI for character. . -thus there is only one level of tax on built-in 50k gain. Assume that there are no changes in value and no basis adjustments between the time X is formed and the date of sale. -BUT we have an exception in Regulations that says if S Corp was formed for principal purpose of selling contributed property. AB = 50.000). X holds the land as an investment. -normally character is determined at Corporate level. Amy held the land for more than 1 year before transferring it to X. Amy transfers land (FMV = 100. so looks like LTCG. in which Amy held the land for more than 1 year. -Amy’s Tax Consequences: -Basis in Stock: 50k.000. -convert to capital loss if principal purpose of contribution is to get Ordinary loss on sale.153 In-Class Examples Chapter 9. X later sells the land for 100. -Plus Corp gets tack HP under 1223(2). Section 3 Corporate Formation & Capital Contributions -Most of the rules we learned for C Corp formation also apply in formation of S Corp.000) in exchange for 50 shares of common stock (FMV = 100. which elects to be treated as an S corporation from the date of formation. which increases her stock basis to 100k. -What is character of gain? -this is inventory type property in Amy’s hands. -What happens when S Corp sells land for 100k? -Gain: 50k = AR: 100k – AB: 50k. (1) Amy forms X Corporation. -And Amy gets a stock basis adjustment under 1367(a)(1) of 50k. -that 50k is passed through to Amy. -S Corp’s Tax Consequences: -Basis in Land: 50k.
362(e)(2) requires S Corp to reduce basis by the net built in loss. -Ben has deferred 50k loss. Amy’s 50k loss is deferred until she sells stock. Instead. not inventory property (like in this case). Cindy transfers 100. that 50k gain passes through to Ben. S Corp sells land for 100k? -under 1366. -Amy gets LTCG only if she has held stock for more than 1 year. at the time of formation. Amy: -351 applies so no gain or loss. Sec. -We could have the 362(e)(2)(C) Election: -Amy’s stock basis: 100k. (4) Same facts as in (1).000 in cash in exchange for 50 shares of common stock (FMV = 100.000. -NOT good idea to make election. -Ben has stock basis of 100k. -What if now. Ben pays tax on 50k gain. X later sells . remember tack HP for Amy only applies if it was 1231 or capital asset property. -So. In addition. -allocate 50k loss to Amy. -Stock Basis: 150k S Corp -Basis in Land: 100k.000. there is 50k loss.000). when S Corp sells land for 100k. Amy sells her stock to Ben for 100.154 (2) Same facts as in (1) except X does not sell the land. NOTE: Remember 743(b) adjustments for P-ship. -So. this would mean Ben would have a 50k special 743(b) basis adjustment. -Gain: 50k = AR: 100k – AB: 50k. -Amy basis in stock is now: 50k b/c 100k less 50k basis adjustment. X later sells the land for 100.000. meaning 150k – 50k = 100k. b/c trap for unwary. and Ben’s stock is increased to 150k. -S Corp’s basis in land: 150k. -Arguably this section should not apply to S Corp. (3) Same facts as in (1) except Amy’s basis in the land is 150.
. The corporation will have a loss for the current year. -has 25k loss inherent. but Perachi limits holding to C Corp. -Each partner is taxed on 25k gain. -Stock Basis: 50k. As of January 1 of the current year. 81-187 says an S Corp SH cannot deduct a loss by contributing his own self-created promissory note. Sec. 357(c). which he can do by contributing cash or contributing property. Can David increase his stock basis (in order to deduct the loss) by contributing his own promissory note to the corporation? -David needs to increase basis. Promissory Note (5) David owns 100% of the stock in an S corporation. -promissory note isn’t an economic investment. meaning 25k gain goes to each partner. -so. or by loaning money to Corp. and b/c purpose of 1366(d) loss limitation is to limit loss to actual investment in Corp (whether equity or debt investment). Rev.155 the land for 100. -What happens when Corp sells land at 100k? -Corp recognizes gain of 50k. -Think back to Promissory Note and 357(c). -Amy: -Sec. (no 704(c) in S Corp) -Stock Basis: -Amy: 75k. ½ of 50k. 351 apples b/c all req’s are satisfied (including control). 351 no g/l -Stock Basis: 100k. gain has been shifted. -Cindy: -Sec. -So. -Amy will in effect recognize all 50k gain in end. S Corp pass through of loss issue. -X Corp -Basis in Land: 50k. David had a 0 basis in his stock. and Lessinger is limited to C Corp. -Perachi says SH has basis in note. so need economic investment. Rul. -Do those cases help an S Corp SH? Do they help SH get basis in note? -looks like the answer is NO. -b/c SH has zero basis in note. -Cindy: 125k.000. -BUT what about contributing own promissory note? -NO.
000 July 1 distributions 16.000 -each SH pays taxes on this income (the pro rata share).000)* Bertha 2.000 26. Property distribution = FMV property – liabilities.000 6. 2. 1st increase basis by income items. Section 3B Problems (page 64) Problem 1(a) -have to increase each SH’s basis by the income 1st. -so our provision for distributions is 1368(b). -use 301 to determine amount of distribution. Arthur Starting stock basis 6. § 1367(a)(1)(B) stock basis increase 12.000 Tax-free portion – § 1368(b)(1) Capital gain portion – § 1368(b)(2) Semi-Ending Stock Basis § 1367(a)(2)(A) stock basis decrease 16.000 0 18k (16. *Debt Basis allows SH to take losses. Answers to Chapter 9. Debt.000 *entire 16k is tax free.000 Nonseparately computed income 36. 1368(b) Distribution Rule for S Corp (1)-to extent distribution does not exceed stock basis.156 S Corp Distributions -most of the C Corp rules (301 and 302) also apply to an S Corp.000* 26k (26.000 26. 1368(d) rules.000) 0 Ending stock basis 2. *distribution > basis is capital gain to Bertha. Cash distribution = cash. and whether it is a 301. 2nd determine if distributions exceed stock basis. it is capital gain. (2)-to extent distribution does exceed stock basis. or liquidating distribution apply.000 24. -Generally an S Corp has no earnings and profits. Don’t apply distr. -so same definitional rules of property. but not distributions.000 24. then next decrease stock basis by the distributions b/c distributions are tax free to extent of stock basis.000 32. 302 redemption. 1368(d) -take into account basis increases at end of year. -generally: 1. it is tax free. -b/c distribution is return of investment. 3rd take loss items into account against basis.000 12. . ag.000 Stock basis after § 1367(a)(1) increases 18.
000) 2k 0 § 1367(a)(2)(B) stock basis decrease Reduction in stock basis for share of loss. S&S has a separately stated § 1231 loss of 15.000 (5.000 0 § 1366(d)(1) limitation amount § 1231 loss (15. Arthur Bertha Stock basis after § 1367(a)(2)(A) decrease 2.000 to S&S and received a 5% demand note from S&S.157 Variation #1 on Problem 1(a): In addition to the nonseparately computed income of 36. on March 1 of the current year. So apply 1st distribution and 2nd loss against stock basis.000) 2. S&S has a separately stated § 1231 loss of 15.000 for the current year.000) (3.000) Amount taken into account for current year -1366(d) limitation amount. Variation #2 on Problem 1(a): In addition to the nonseparately computed income of 36. Same as (1)(a) through the § 1367(a)(2)(A) stock basis decrease.000) 0 0 0 0 (10.000) (2.000. Amount of carryover loss – § 1366(d)(2)(A) Notes: shows that distributions are taken into account before losses are against stock basis. Bertha loaned 10. Also. thus use stock basis after distribution for 1366(d) limitation amount.000) 0 (10.000 for the current year.000. Ending stock basis (2. .
000 10. a. Arthur Bertha Stock basis after § 1367(a)(2)(A) decrease 2.000) (3. 3. 2.000) 0 10.liabilities. but it does increase her § 1366(d)(1) limitation amount. it is 1st used to restore Debt Basis.000) 0 0 (10. Increase debt basis by income items. decrease stock basis by distributions. decrease stock / debt basis by loss items.000 0 Starting debt basis § 1366(d)(1) limitation amount § 1231 loss (15. Property = FMV . . Note: Bertha’s debt basis does not change the tax consequences of her distribution. increase stock basis by income items.000) (2.000) (10.000 (5. 4. -Remember that when SH is allocated future income.158 Same as (1)(a) through the § 1367(a)(2)(A) stock basis decrease.000) 2.000) 0 0 Amount taken into account for current year Amount of carryover loss – § 1366(d)(2)(A) § 1367(a)(2)(B) stock basis decrease § 1367(b)(2)(A) debt basis decrease Ending stock basis Ending debt basis Notes: Debt basis only gives SH additional 1366(d)(1) limitation amount for taking losses. So Bertha still recognizes gain on distribution b/c it exceeds stock basis. Cash = Cash b.000) (2.000 (10. Ordering Steps: 1.
000 6. -S Corp recognizes gain on distribution. 311(b) treat as though Corp sold property to SH at FMV. Assume both are § 1231 gains. *301(d) determines basis of property for each SH. 301(c) for tax consequences of distribution.000 4.000 0 (24.000 2.000 2k Starting stock basis Separately stated § 1231 gain Nonseparately computed income Stock Basis . 301(d) -Bertha takes a FMV basis of 24. and the amount of Bertha’s distribution is 24. so the 6k gain is pro rata to SHs. 12.000 (the FMV of Blackacre).000 24.159 Problem 1(b) S&S recognizes a gain of 4.000 6k § 1367(a)(1)(A) stock basis increase (1231 6k. Ending stock basis Basis in Property -Arthur takes a FMV basis of 12. -Remember 1368(b) overrides Sec. but 301(b) still applies to determine amount of distribution.000 24.000 20. Sec.000 on the distribution of Whiteacre.000 8. 311(b) gain) 2.000) 6.000 § 1367(a)(1)(B) stock basis increase Stock basis after § 1367(a)(1) increases December 31 distributions Tax-free portion – § 1368(b)(1) Capital gain portion – § 1368(b)(2) § 1367(a)(2)(A) stock basis decrease b/c of distribution. The amount of Arthur’s distribution is 12.000 30.000 0 (12.000 (the FMV of Whiteacre).000 12.000 Bertha (2/3) 2.000 in Whiteacre. -Remember this gain is passed through.000 24. See § 301(b).000 24.000 12.000 36. See § 301(d). See § 311(b).000 on the distribution of Blackacre and a gain of 2.000 4. -this 6k 1231 gain is passed through to the SH’s.000 in Blackacre. Arthur (1/3) 6. Which is 12k (FMV of property) to Arthur and 24k (FMV of property) to Bertha.000 12.
should it carry over to reduce basis in future years? See §§ 1366(d)(2)(A). Starting stock basis Nonseparately computed income § 1367(a)(1)(B) stock basis increase Stock basis after § 1367(a)(1) increases December 31 distributions Tax-free portion – § 1368(b)(1) Capital gain portion – § 1368(b)(2) -b/c 36k exceeds 26k basis by 10k.000 (the amount of cash distributed). -1366(d) just talks about actually deductible expenses.000 24.000 0 Bertha 2.000 26.000) 0 (26.000 18. If so.000 26.000 10. say non-sep stated income is determined per share per day.000) 0 Arthur 6. then there needs to be a basis reduction. 311(a) works in practice as “loss disallowance” rule.13671(f).000 12. The amount of Arthur’s distribution is 18.1367-1(c)(2) gives a non-exclusive list of examples. and the amount of Bertha’s distribution is 36. nondeductible expense that reduces basis under § 1367(a)(2)(D)? See § 1.000 36.000 18. -BUT if make 1366(d) election.000 in Greenacre. -so give explanation of Table. See § 301(b). . -so. (18.000 18. See § 301(d). Unresolved issues: Should the unrecognized loss on Greenacre be treated as a noncapital. then yes the 311(a) loss is carried forward. it looks like the 311(a) loss would not be carried forward. no tax consequences change b/c of 311(a) disallowed loss. . § 1367(a)(2)(A) stock basis decrease -recued by the tax free portion.000 12. See § 311(a) prevents recognition of loss. *On exam. -in problem. 1.000 (the FMV of Greenacre). and one is example of loss disallowed. -And if policy is to permanently disallow loss forever. Ending stock basis Basis in Property: Bertha takes a FMV basis of 36.000 36. so maybe it should be treated as non-cap non-ded expense.160 Problem 1(c) S&S does not recognize any loss on the distribution of Greenacre. not non-ded non-cap expenses. those don’t get carried over.000 24.000 . -can say basis is increased and decreased by . (g).
000 500. Louise’s amount realized (AR) is 800. -Sec.000 420.000) (500. . -1231 Gain on BA: 1 mil gain = AR: 1. See § 1.000 (the FMV of Blackacre).000 Stock basis immediately before liquidation* Liquidating distribution (amount realized – AR) AR = FMV less liab. 336(a) allows for the recognition of the loss and gain.1367-1(d)(1) gives rules for when to do basis adjustments. § 331(a) applies to the shareholders. See § 336(a).1 mil – AB: 1.000 280. -1231 Loss on WA: AR: is FMV b/c of 336(b) says use greater of FMV or liab. Assume the gain is a § 1231 gain and the loss is a § 1231 loss.000 1. 59-228 (TB 355) says to reduce FMV by liab.000.200. See Rev. 300k loss = 1. Pro rata share (det on per share per day basis) Starting stock basis 60% Thelma 40% 280.000 Separately stated net § 1231 gain 1 mil – 300k= 700. NOTE: with liquidation. § 1367(a)(1)(A) stock basis increase* 420. 267 is n/a. assumed for determining AR.000 on the distribution of Whiteacre.161 Problem 2 Thunderbird recognizes a gain of 1.000 800.000 (700. See § 1. -this loss and gain is recognized in liquidation.000 CG CG *The § 1367 stock basis adjustments take effect immediately before the liquidation. you would adjust basis for decreases before distribution! -do all basis adjst for loss and income before doing distribution. -plus.200.4 mil. stated item. -Sec.1367-1(d)(1). 336(d)(1)(A) is n/a b/c Louis who received loss property is not a related party under 267. Rul. The § 1367 stock basis adjustments take effect immediately before the liquidation.000 300.000 280.000 -reg’s allow net of 1231 gain / loss.000 Louise 220.000 (the FMV of Whiteacre minus the mortgage debt).000) 500. Stock basis for determining gain on liquidation Gain recognized on liquidating distribution -331(a) 700.2 mil – AB: 200k.000 on the distribution of Blackacre and a loss of 300. -this is Net 1231 gain sep. Thelma’s amount realized (AR) is 1.
which is FMV. . and Louise takes a FMV basis of 1.000 in Blackacre.162 Thelma takes a FMV basis of 1. See § 334(a) determines basis on liquidation.100.200.000 in Whiteacre.
-only can work is when there is a Q-Sub. an S Corp can own 80% of C Corp. 40k * 3 per share = 120k NOTE: for 302. to be owner of S Corp. no recognition of gain. An S Corporation prefers a 301 distribution b/c gets to receive distribution tax-free. Before the redemption.163 Sec. Catherine’s remaining stock basis = 120. unrelated shareholder. See Rev.000 (her basis in the 40 retained shares). -an S Corp is treated as any C Corp to determine constructive ownership. 332 and 337 Can an S Corp ever liquidate under 337? -no can’t have an 80% Corporate Parent b/c non-eligible SH. Catherine owns exactly 50% of the stock and the other 50% is owned by a single. (Point is that you still apply 302 and 301 to S Corp. Can S Corp be parent of C Corp? -Yes. Catherine recognizes a gain of 90. -this is a tax free return of basis.) If so: The redemption is treated as an exchange under § 302(a).000 AB (her basis in the 20 redeemed shares). -and C Corp would use 332 rules. the 318 attribution rules apply to C Corp. The distribution reduces Catherine’s stock basis under § 1367(a)(2)(A). The redemption does not meet the tests in § 302(b)(3) and (b)(2). -that is to attribute S Corp ownership to other parties / entities.The entire distribution is tax-free under § 1368(b)(1). -Catherine’s gain = 150. . need to own more than 50%. Rul.000. basis is 60k b/c 180k / 60 = 3k per share * 20 = 60k. Catherine owned 60% of the stock. so the redemption should meet the test in § 302(b)(1) b/c is meaningful reduction. 75-502 (TB 272). -.000 AR – 60. Catherine’s remaining stock basis = 30. -thus. After the redemption. If not: The redemption is treated as a § 301 distribution under § 302(d).000. Problem 3 This is a redemption. so test to see if it satisfies 302(b) test.
. -items flow through to SH’s in corresponding tax year (2009 S Corp items to SH’s in 2009 include on 2009 tax return). -reduce debt basis by loss items when stock basis is reduced to 0. (g-g-g-g grandparent). Slides 24-S Corp makes election (i. Debt Basis -only counts if SH holds debt at end of taxable year (meaning unpaid debt). -will be told on exam whether it is non-ded. non-cap expense. -Disregarded single-member LLC. -so make sure you know them. 179 election) -S Corp gets no 151 PE.e. look at eligibility of owner of LLC to see if qualifies as a SH of S Corp. -youngest generation can trace back 6 generations. and does not get the 243 DRD.164 Chapter 9 Review -you will have eligibility and election questions on exam (slides 1-23).
.165 Final Exam: -go 2 decimal places. -only have to explain the rule once in a problem. -no req’t to cite case names. -3 hour exam with 4-5 essay problems. and Regulations. or 7. Chapter 5 will be given starting E&P. -i. -give anything relevant to problem. -clearly NOT tested: Chapter 1. 6. Chapter 4. -also. -Friday at 1pm. explain 302(b)(2) once. -if can do this. -but exam is time pressured so you need to know your stuff. need to direct on how you’re doing this. Review Session -Monday April 27 at 2pm. but still can do -need to explain code section the 1st time. . of it). -will take e-mail questions until 8pm before day of exam. 302(b)(3) test is satisfied if redemption is in complete termination of all stock. re-do each example and problem. 3. -if do this.e. -could say not satisfied b/c not in complete redemption . -exam is completely open book. -other 2 problems could test chapter 2. -definitely have large chapter 3 and chapter 5&6 problem. -need to get 4 bluebooks for exam. Rev Rulings. -even though answer is a number. then refer back to it.77%. 5. -so basically explain each code section. -in studying. need to explain 318 attribution rules. -be able to cite code (351 or 301 is enough). . explain how you got there. Chapter 3 not responsible for id’ing NQPS (but do know tax conseq. -i. -how to answer problem: -thoroughly explain the answer. -have option to type and handwrite exam (do combo). -only write on front of page.e. and study review slides. meaning 77. no back. -what we covered in class is tested. -and definitely will have 1 chapter 9 problem. non at all. b/c can only gain points not lose them. explain each step in how you get to total stock ownership number. then won’t have any problem with exam.
do we still apply Sec. 302(b)(2)(D) is not satisfied. what if debt is boot? How is it treated in calculating SH’s stock basis? 2-If STD applies or Sec. And Wife (W) owns 50 shares of Corp. 302(c)(2)(C)(ii)(II) does only H have to agree to be held jointly and severally liable? -If W is not a “Related Person. 302(b)(2)(D) does not apply? 5-If you have an entity (p-ship) where Husband (H) is partner.If distribute 302 appreciated property. Do both H and W have to agree to be held jointly and severally liable for any tax deficiency? Or b/c of “Related Person” as defined in Sec. and entity owns 50 shares of Corp.” then can W acquire a prohibited interest? (all 5 answered). 358. 302(b)(2)(D) applies.166 Questions: 1-for basis rules under Sec. allocate all excess CEP there? -find problem example for this! 3-Net LTCG against LTCL? And ST against ST? But not ST against LT?? . and (2) the transferred stock is redeemed from the transferee in the same transaction? What does (2) mean? 2. Questions: 1-when does 302(c)(2)(B)(ii) not apply (1) when there is not tax avoidance purpose. how are the “redemptions” treated? Are they treated as 302(b)(2)? 4-Do you apply STD principles when single redemption satisfies 302(b)(2) but series as aggregate does not satisfy 302(b)(2) and Sec. 302(b)(1) or (b)(3)? 3-If Sec.
This action might not be possible to undo. Are you sure you want to continue?