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Learning Objectives
1.
2.
3.
4.
5.
6.
18-2
Dividends
Stock redemption
Partial liquidation
18-4
Dividend distribution
E&P
18-5
Dividend distribution
Shareholders
2. Accumulated
E&P(Dividend)
1.Shareholders basis
(return of capital)
18-6
Dividend distribution
2.
3.
18-7
Example 18-1
Jim has a tax basis in his Spartan Cycles and Repair (SCR)
stock of $24,000. Ginny's tax basis in her SCR stock is
$10,000. Assume SCR has current earnings and profits
(CE&P) of $30,000, and no accumulated earnings and
profits. At year-end, SCR makes a $48,000 distribution to
Jim and a $16,000 distribution to Ginny. Jim owns 75
percent of the SCR stock, while Ginny owns the remaining
25 percent.
What is the tax treatment of the distribution to Jim and
Ginny? What is Jim and Ginny's tax basis in their SCR
stock after the distribution?
18-8
Compute E&P
18-9
18-10
18-11
Example
Oakland Corporation reported a net operating
loss of $500,000 in 2013 and elected to carry
the loss forward to 2014. Not included in the
computation was a disallowed meals and
entertainment expense of $20,000, tax-exempt
income of $10,000, and deferred gain on an
installment sale of $250,000. The corporation's
current earnings and profits for 2013 would be?
12
18-12
18-13
18-15
Example 18-4/5
On December 31, SCR distributed $48,000 to Jim and
$16,000 to Ginny. Jim has a tax basis in his SCR
stock of $24,000. Ginny's tax basis in her SCR stock
is $10,000. Jim has 75% ownership and Ginny has
25% ownership.
Calculate dividend income and tax basis for each
shareholder when 1) When SCR reported current E&P of
$40,000. The balance in accumulated E&P at the beginning
of the year was $16,000; 2) When SCR reported current E&P
of $60,000. The balance in accumulated E&P at the
beginning of the year was negative $20,000;
18-16
No dividend recognized
Reduce shareholders tax basis in their stocks
18-18
Example 18-6/7
On June 30, SCR distributed $48,000 to Jim and $16,000
to Ginny. Jim has a tax basis in his SCR stock of $24,000.
Ginny's tax basis in her SCR stock is $10,000. Jim has
75% ownership and Ginny has 25% ownership.
Calculate dividend income and tax basis for each
shareholder when 1) SCR reported current E&P of negative
$20,000. The balance in accumulated E&P at the beginning
of the year was $60,000. 2) SCR reported current E&P of
negative $50,000. The balance in accumulated E&P at the
beginning of the year was negative $60,000.
18-19
18-20
Example 18-10
Assume Jim elected to receive a parcel of land the
company had previously purchased for possible expansion
instead of cash. The land has a fair market value of
$60,000 and a remaining mortgage of $12,000 attached to
it. SCR has a tax basis in the land of $20,000. Jim will
assume the mortgage on the land. SCR has current E&P of
$100,000 and no accumulated E&P. How much dividend
income does Jim recognize on the distribution? What is
Jim's tax basis in the land he receives?
18-21
18-23
Example
Assume Bill Hotdog has current and accumulated E&P of
400,000 at December 1, 2013. On December 31, the
company made a distribution of office building to its sole
shareholder, Bill. Calculate the tax consequences for Bill
Hotdog (gain recognized and E&P)
1) The office building's fair market value was $150,000
and its tax and E&P basis was $100,000. 1a) Bill
assumed a liability of $25,000 attached to the office
building; 1b) What if Bill assumed the liability of
200,000;
2) The office building's fair market value was $50,000 and
its tax and E&P basis was $100,000. Bill assumed a
liability of $25,000 attached to the office building;
18-24
Constructive Dividends
18-25
Constructive Dividends
Stock Dividends
Distribute
18-27
Stock Dividends
Example
Sweetwater Corporation declared a stock dividend to all
common stock shareholders of record on December 31,
2013. Shareholders will receive 1 share of Sweetwater
common stock for each 5 shares of common stock they
already own. Pierre Dorgan owns 500 shares of
Sweetwater common stock with a tax basis of $150 per
share. The fair market value of the Sweetwater common
stock was $90 per share on December 31. What is Pierre's
income tax basis in his new and existing common stock in
Sweetwater, assuming the distribution is non-taxable?
18-29
Shareholders
Corporation
Buy back stocks
18-30
18-31
2.
3.
If
Example 18-17
Assume Walk owns 25 shares out of 125
shares that SCR issues. This year, SCR
redeemed five shares of his stock in
exchange for $25,000. Walt has a tax basis
in the five shares of SCR stock of $10,000
($2,000 per share). Is this qualified for stock
redemption? How much dividend or capital
gain should Walk recognize? If not, how
many shares does SCR need to redeem to
be qualified?
18-34
Stock Redemptions
18-35
Stock Redemptions
Family attribution
Eg. Suppose that Josh and Jane are a couple. If the family
attribution applies to Josh, then Jane does not need to apply
the family rule again.
18-36
Example
Crystal, Inc. is owned equally by John and his wife Arlene,
each of whom own 500 shares in the company. Arlene
wants to reduce her ownership in the company, and it was
decided that the company will redeem 200 of her shares for
$5,000 per share on December 31, 2013. Arlene's income
tax basis in each share is $1,000. Crystal has current E&P
of $1,000,000 and accumulated E&P of $3,000,000. What
is the amount and character (capital gain or dividend)
recognized by Arlene as a result of the stock redemption,
assuming only the "substantially disproportionate with
respect to the shareholder" test is applied? What is her tax
basis in the remaining shares?
18-37
Stock Redemptions
Complete Redemptions
18-38
18-39
Partial Liquidations
18-40
homework
34,
18-41