Corporate nonliquidating distributions problems

A corporation will not recognize any gain or loss on a distribution of cash to its shareholders.[13] 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.[14] 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.[1] 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.[2] Any remaining portion is treated as gain from the sale or exchange of property (capital gain).[3] 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.[4] Special rules also apply at the corporate level.[5] 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.[6] 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.[11] Similarly, shares held by corporations, trusts, and partnerships are deemed to be owned by their shareholders beneficiaries, and partners, and vice versa.[12] 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.

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