Corporate nonliquidating distributions problems
A corporation will not recognize any gain or loss on a distribution of cash to its shareholders. But if the corporation distributes appreciated property, the corporation must recognize gain as if the property were sold to the shareholder at fair market value. Important Note: These two rules operate as a loss disallowance system.If the corporation distributes appreciated property, the corporation is taxed on the gain under Code § 311(b).To the extent that a distribution is made from the corporation’s earnings and profits, it is taxed to the shareholder as a dividend. The portion of the distribution that is not considered a dividend is applied first to reduce the shareholder’s basis in the corporation’s stock. Any remaining portion is treated as gain from the sale or exchange of property (capital gain). Important Note: If a shareholder assumes a liability or takes property subject to a liability, the amount of the distribution is reduced by the amount of the liability. Special rules also apply at the corporate level. Special rules apply to distributions to a shareholder in exchange for the shareholder’s stock (redemptions).Instead of being treated as dividends, redemptions are treated as a sale or exchange of the stock by the shareholder. The distinction can be important when the long-term capital gains rates (which apply to redemptions) are higher than the tax rates on dividends.
These attribution rules provide that shares owned by a shareholder’s parents, children, and grandchildren (but not siblings) are considered to be owned by the shareholder. Similarly, shares held by corporations, trusts, and partnerships are deemed to be owned by their shareholders beneficiaries, and partners, and vice versa. As a result, shares held by these family members and entities are considered to be owned by the shareholder for purposes of determining whether the distribution qualifies as a redemption.
If the stock is a capital asset in the shareholder’s hands, the transaction qualifies for capital gain or loss treatment.
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Red roses of the premium ‘Taj Mahal’ variety are stacked by a buyer after an auction at the International Flower Auction Bangalore (IFAB) centre on February 12, 2015 in preparation for ‘Valentines Day’ to be celebrated world-wide on the 14th.
There is a line of romantic advice that goes something like, “Don’t marry the one you can live with, marry the one you can’t live without.” It’s a statement that’s meant to be profound in its simplicity, but the more I hear it and read it and think about it, the more I think it’s a huge load of poo.
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Shareholders that do not have a strong preference on whether distributions in 2012 are taxed as dividends or capital gain/loss may prefer sale or exchange (capital) treatment in 2012 if they: Shareholders that assume corporate liabilities or receive property subject to corporate liabilities take the liabilities into account in computing their gain or loss.