Federal Taxation VIII: Corporate Redemptions, Liquidations, Reorganizations Flashcards Preview

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Flashcards in Federal Taxation VIII: Corporate Redemptions, Liquidations, Reorganizations Deck (31):

Redemption of Stock

when a corp repurchases stock from a s/h

1. can be treated as a sale of stock, triggering gain/loss
2. can be structure and taxed as a dividend


Three Methods to Qualify a redemption as a sale

1. NEED - not essentially equivalent to a dividend - meaningful reduction in s/h rights
2. CONTROL or REDUCED INTEREST (s/h owns less than 50% voting shares after redemption or less than 80% of what was owned prior to redemption)
3. COMPLETE TERMINATION of s/h interest is a sale


Family Attribution

Stock is owned by family members (spouse, children, grandchildren, parents - not siblings)


Entity Attribution

Stock owned by corporation, partnership, trust or estate is deemed to be owned by taxpayer who is an owner or beneficiary of the entity.

Also, stock owned by the owner/beneficiary may be deemed to be owned by the entity.


Entity Attribution: Corporations

1. Entity to owner: if s/h owns 50% or more
1. Owner to entity: stock owned by a 50% or more s/h is deemed owned 100% by corp


Entity Attribution: Partnership (also estates/trusts)

1. Entity to owner: Stock owned by partnership is deemed to be owned by partner based on ownership interest in partnership.
2. Owner to entity: Stock owned by a partner is deemed owned in full by partnership


Consequence to Corporation of distributing appreciated property as part of redemption

Appreciation recognized by the corp


Consequence to Corporation of distributing assets that have declined in value as part of a redemption

Loss is not recognized


Partial Liquidations

A contraction of the corporate business. Treated as a sale by noncorporate s/h.


Objective Test for Partial Liquidation

corporation must completely terminate a qualifying business (trade conducted 5 yrs prior to determination), and must continue to operate at least 1 qualifying business


Subjective test for Partial Liquidation

the distribution must qualify as not essentially equivalent to a dividend in that it results from a genuine contraction of the corporate business, and not just from the sale of excess inventory


Redemption used to pay death taxes may be treated as a sale if:

1. stock held by the decedent is more than 35% of adjusted gross estate
2. redemption is limited to amount of federal/state death taxes + funeral/administrative expenses


Stock Distributions

Not taxable to shareholder if there is no option to receive property in lieu of stock and no change in proportionate interests of the shareholders


Stock Bailout

Distribution of nonvoting stock followed by sale/redemption of the stock by the corporation - treated as a dividend to the s/h to the extent of E&P at time of sale/redemption


Complete Liquidation (detailed study text)

occurs with dissolution of a corporation and distribution of remaining assets

1. s/h recognize gain/loss
2. corp recognizes gain/loss
3. subsidiaries - no gain/loss recognized


Type A reorganziation

merger/consolidation under state law (statutory merger)

1. Target is exchanging assets for Aquired's stock... once Target dissolves, s/h of Target own Acquiring stock

2. At least 50% of consideration provided to Target by Acquiring must be stock in Acquiring



acquired corporation (target) dissolves into another corporation (acquiring corp)



both the acquired and the acquiring corps dissolve into a new (surviving) corporation


Type A reorganization s/h gains/losses

s/h of acquired firm can only defer gains/losses to extent they receive equity of acquiring corp

forms of payment that do not qualify as equity are considered boot


Type B reorganization (tax-free)

acquisition of stock of target solely in exchange for voting stock of acquiring

1. acquiring exchanges its own stock for stock Target

2. target remains in existence, but is now owned at least 80% by acquiring

3. former target shareholders now own stock in acquiring


Type C reorganization

acquisition of substantially all of the assets of target solely in exchange for voting stock of acquiring firm.

1. target is exchanging its assets for acquired's stock (90% of net asset value and 70% of gross asset value)

2. s/h of target own acquiring stock after reorganization (voting stock must be at least 80%)


Type D reorganization

parent corporation divides by transferring assets to a subsidiary in exchange for subsidiary shares

1. parent distributes subsidiary share to s/h (spin -off) or redeems parent stock with subsidiary stock (split-off) or liquidates into two new corporations (split-up)

2. parent must receive/distribute control of subsidiary in the exchange (80% of all classes of stock)


Tax-Free Reorganizations must meet judicial principles (4)

1. must be valid business purpose
2. continuing of the business enterprise
3. continuity of interest requirement
4. step transaction doctrine


Reorganization: Acquiring Corp Gain/Loss

does not recognize gain/loss unless distributes appreciated property... appreciated property will trigger gain recognition to acquiring corp


Reorganization: Acquired Corp Gain/Loss

does not generally recognize gain/loss unless distributes appreciated property


Reorganization: S/H Gain/Loss

no gain/loss recognized if they receive only stock in exchange for property

if they received other property it is "boot" and gain realized is lesser of boot received or realized gain


Reorganization: Shareholder Basis in stock received

Basis in stock surrendered
+ Gain recognized
- Boot received


Tax attributes

of the target firm (such as NOL/carryovers) survive in reorganizations

1. if a target firm disappears, acquiring corp is entitled to target's tax attributes

2. if target survives (as subsidiary), tax attributes stay with target



acquiring firm purchases stock and operates target as subsidiary, then neither firm recognizes gain/loss


Section 338 elections

under certain conditions in a taxable stock purchase, acquiring firm can elect to step up the basis of the target's asset to FMV


Taxable Mergers

if acquiring firm merges target or acquires assets of target, then target corp recognizes gains/losses on xfer of its assets

adjusted basis of target's assets = FMV. Any excess purchase price = goodwill amortized over 15 years