9.3 - Distributions

Question 1

Distributions

What is a distribution?

Answer 1

• Any transfer of property by a corporation to any of its shareholders with respect to shareholder’s shares in the corporation

Question 2

Distributions

Define “property” in the form of distributions

Answer 2

• Money
• Bonds or other obligations
• Stock on other corporations (not of the distributing corporation)
  
  • Other property including receivables

Question 3

Distributions

Define the formula used to calculate the distribution amount:

Answer 3

Money + Obligations (FMV) e.g. bond + Property (FMV), other - Related liabilities, recourse or not = Distribution amount

Question 4

Corporate Treatment

Identify the form and due date of required filing for corporations who issue dividends

Answer 4

• Form 1099-DIV
• Due 2/28th of the following year

Question 5

Corporate Treatment

Identify the financial actions or distributions of the corporation that would cause them to have to file Form 1099-DIV?

Answer 5

• Paid gross dividends of $10 +
• Withheld any federal income taxes under the backup withholding rules
• $600 + payment as liquidation

Question 6

Corporate Loss Unrecognized

Identify the corporate accouting treatment of a distribution if the AB > FMV

Answer 6

No loss realized on an ordinary distribution of property may be recognized

Question 7

Corporate Loss Unrecognized

What basis does a shareholder take in property if the corporate loss of distribution is not recognized?

Answer 7

FMV basis in property

Question 8

Corporate Loss Unrecognized

How is stock owned by related parties attributed?

Answer 8

to the shareholder

Question 9

Corporate Loss Unrecognized

How is the gain realized on a subsequent taxable disposition to an unrelated party treated?

Answer 9

it is recognized only to the extent it exceeds previously disallowed losses

Question 10

Corporate Gain Recognized

How is gain realized on distributed property treated by the corporation?

Answer 10

gain recognized as if sold to distributor at its FMV

Question 11

Corporate Gain Recognized

True or False >>> Gain is recognized on distribution of money or obligations the corporation issues

Answer 11

False -

• No gain recognized on distribution of money or obligations it issues

Question 12

Corporate Gain Recognized

True or False >>> FMV cannot be less than property liabilities in a corporate distribution

Answer 12

True

Question 13

Corporate Gain Recognized

How is the character of recognized gain determined in a corporate distribution?

Answer 13

by treating distribution as a sale to shareholder

Question 14

Corporate Gain Recognized

True or False >>>

• Gain recognized on depreciable property with shareholder having more than 50% distributee is OI

Answer 14

True

Question 15

Corporate Gain Recognized

What effect does recognized gains have on E&P?

Answer 15

increase

Question 16

Corporate Gain Recognized

What effect does tax on gains have on E&P?

Answer 16

decrease E&P

Question 17

Corporate Gain Recognized

How do liabilities assumed by shareholder impact earnings and profits?

Answer 17

increases earnings and profits

Question 18

Corporate Gain Recognized

How does the FMV of distributed property impact earnings and profits?

Answer 18

reduces earnings and profits

Question 19

Shareholder Treatment: Dividends

Define the treatment of a distribution as a dividend

Answer 19

• Distribution is a dividend to extent of current E&P and then to accumulated E&P

Question 20

Shareholder Treatment: Dividends

Identify the dividend treatment when yearly distributions are > current earnings and profits

Answer 20

• Pro rata portions deemed to be from current E&P

Question 21

Shareholder Treatment: Dividends

Identify the treatment of prorata portions when distributions are > current E&P and the current E&P balance is negative

Answer 21

prorate negative balance to date of each distribution made during the year

Question 22

Shareholder Treatment: Dividends

Identify the treatment of prorata portions when distributions are > current E&P and the current E&P balance is positive

Answer 22

• the positive balance computed as of close of taxable year without regard to amount of E&P at time of distribution

Question 23

Shareholder Treatment: Dividends

True or False >>>

• Distribution treatment determined by reference to accumulated E&P only after current E&P accounted for

Answer 23

True

Question 24

Shareholder Treatment: Capital Recovery

Describe the treatment of distribution amounts in excess of dividends

Answer 24

• treated as tax-exempt return of capital

Question 25

# Shareholder Treatment: Capital Recovery How do distributions in excess of dividends impact basis?

Answer 25

Reduce basis - but not below zero

Question 26

# Shareholder Treatment: Capital Recovery Identify the treatment of excess distributions over dividends amongst shares with different bases

Answer 26

apportion the distribution amongst the shares if they have different bases

Question 27

# Shareholder Treatment: Gain on Sale Define gain on sale of a distribution

Answer 27

Excess distribution amount over E&P and basis

Question 28

# Shareholder Treatment: Gain on Sale How is the character of the gain on sale determined?

Answer 28

by the nature of the property (capital asset or dealer property)

Question 29

# Shareholder Treatment: Gain on Sale When does shareholder recognize loss on stock distribution?

Answer 29

if stock becomes worthless or is redeemed

Question 30

# Shareholder Treatment: Basis in Distributed Property What is the shareholder's basis in non-liquidating distribution property?

Answer 30

FMV at time of distribution

Question 31

# Shareholder Treatment: Basis in Distributed Property If the shareholder assume liabilities of the distributed property that are \< FMV, then the shareholder's basis =

Answer 31

FMV

Question 32

# Shareholder Treatment: Basis in Distributed Property If the shareholder assume liabilities that are \> FMV, then the shareholder's basis =

Answer 32

Liability assumed

Question 33

# Extraordinary Dividend What qualifies a dividend as an extraordinary dividend?

Answer 33

* Dividend on stock held 2 years or less, and * Exceeds 10% (5% for preferred stock) of either basis or FMV of stock

Question 34

# Extraordinary Dividend How is the shareholder affected when stock is sold on which an extraordinary dividend was received?

Answer 34

additional gain is recognized

Question 35

# Extraordinary Dividend How does the nontaxed portion (DRD) of the extraordinary dividend impact basis?

Answer 35

basis is reduced by nontaxed portion (DRD) of the extraordinary dividend

Question 36

# Extraordinary Dividend Identify the financial impact of the nontaxed portion (DRD) exceeding the stocks' basis

Answer 36

* Excess treated as gain in year extraordinary dividend received

Question 37

# Stock Distributions Do corporations recognize gain or loss on distribution of own stock?

Answer 37

No

Question 38

# Stock Distributions Do shareholders include distribution of stock or rights to acquire stock in gross income?

Answer 38

No - but certain exceptions apply

Question 39

# Stock Distributions Identify the exceptions, if any, to a shareholder including the distribution of stock or rights to acquire stock in gross income

Answer 39

* Exceptions: * Distribution in lieu of money (treated as a dividend) * Disproportionate distribution * Distribution of preferred stock * Distribution of convertible preferred stock * Distribution of common & preferred stock

Question 40

# Stock Distributions: Proportionate Distribution Describe the proportionate distribution of stock process

Answer 40

* Shareholder allocates aggregate basis (AB) in the old stock to the old stock & new stock in proportion to FMV of old & new stock * Basis apportioned by relative FMV to different classes of stock if applicable

Question 41

# Stock Distributions: Proportionate Distribution How is the holding period of distributed stock treated in a proportionate distribution?

Answer 41

tacked - meaning it includes holding period of old stock

Question 42

# Stock Distributions: Proportionate Distribution How do tax free stock dividends impact earnings & profits?

Answer 42

It does not - no impact

Question 43

# Stock Distributions: Stock Rights How are stock rights treated in a stock distribution?

Answer 43

as a distribution of the stock

Question 44

# Stock Distributions: Stock Rights How is basis allocated in a stock rights distribution?

Answer 44

* Basis allocated based on FMV of the rights

Question 45

# Stock Distributions: Stock Rights What is the basis of the stock rights if aggregate FMV is \< 15% of FMV of stock on which they were distributed on, unless shareholder chooses to allocate

Answer 45

Basis = $0

Question 46

# Stock Distributions: Stock Rights What is the basis in a stock if the right is exercised?

Answer 46

Any basis allocated to the right + the exercise price

Question 47

# Stock Distributions: Stock Rights When does the holding period of stock begin that has been exercised?

Answer 47

on the exercise date

Question 48

# Stock Distributions: Stock Rights Is a deduction allowed for basis allocated to lapsed stock rights?

Answer 48

No

Question 49

# Taxable Stock Distribution Identify the amount of distribution subject to tax in a taxable stock distribution

Answer 49

* FMV (unless otherwise stated) of distributed stock or stock rights

Question 50

# Taxable Stock Distribution Identify 3 distributions that are subject to tax

Answer 50

* Distribution of stock or other property * Distribution amount = \> of FMV of stock or cash or FMV of other property * Increase in proportionate interest * Receipt of common or preferred stock

Question 51

# Taxable Stock Distribution How is earnings and profits impacted by the FMV of stock and stock rights distributed?

Answer 51

Earnings and profits are reduced by the FMV of stock and stock rights distributed

Question 52

# Taxable Stock Distribution What is the impact on the basis to the underlying stock in a taxable stock distribution?

Answer 52

* Basis in underlying stock does not change * Basis in new stock or stock rights is their FMV

Question 53

# Taxable Stock Distribution When does the holding period start for new stock in a taxable stock distribution?

Answer 53

* Holding period for new stock begins on day after distribution date * There is no tacking of holding period for underlying stock if distribution is taxable

Question 54

# Stock Split Is a stock split considered a distribution?

Answer 54

No

Question 55

# Stock Split How is basis accounted for in a stock split?

Answer 55

* Basis in old stock is “split” and allocated to new stock

Question 56

How do stock splits impact the holding period of stock?

Answer 56

* Holding period of new stock includes that of old stock (tacked) * Stock splits are not taxable transactions