Taxes: Corporate Redemptions & Liquidations Flashcards Preview

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Flashcards in Taxes: Corporate Redemptions & Liquidations Deck (8)
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1

Taxes:
Corporate Redemptions & Liquidations
Redemptions

Redemptions
- corporation repurchases stock from a shareholder
- treated by shareholder as sale of stock that will result in gain/loss
- or it could look like a dividend distribution & must be taxed as such
2 Advantages
- offset stock basis against redemption proceeds
- any resulting gain is treated as capital gain

2

Taxes:
Corporate Redemptions & Liquidations
Redemptions
3 Methods to Qualify

3 Methods to Qualify
1. treated as sale if not essentially equivalent to a dividend (NEED) (reduction of rights)
2. substantially disproportionate redemption will qualify as a sale if passes the control and reduced interest tests
a) control: own less than 50% voting shares
b) reduced interest: own less than 80% shares prior to redemption
3. complete termination qualifies as a sale

3

Taxes:
Corporate Redemptions & Liquidations
Redemptions
Attribution

Attribution
- includes shares owned directly and indirectly
Family Attribution
- stock owned by spouse, children, grandchildren, and parents (not siblings here)
Entity Attribution
- stock owned by corp, partnership, trust, or estate deemed to be owned by taxpayer who is owner/beneficiary
1. Entity to Owner: shareholder owns 50% or more. if less none is attributed
2. Owner to Entity: stock owned 50%+ by shareholder deemed owned 100% by entity
Partnership Attribution
1. Entity to Owner: stock owned by partnership deemed owned by partner based on ownership interest (all partners)
2. Owner to Entity: Stock owned by partner deemed to be owned in full by partnership (all partners)

4

Taxes:
Corporate Redemptions & Liquidations
Redemptions
Consequences to Corporation

Consequences to Corporation
- if corp distributes appreciated property, appreciation is recognized by corp
- loss on distributive assets that have declined in value is disallowed
- may have sec 1245 or 1250 depreciation recapture
- corp must reduce E&P by recapture to lower of:
a) redeemed stock's proportionate share of E&P or
b) amount of redemption
- if dividend, greater of FMV or adj basis less liabilities

5

Taxes:
Corporate Redemptions & Liquidations
Partial Liquidation

Partial Liquidation
- treated as a sale by non-corporate shareholders
1. Objective Test: completely terminate one qualifying business and continue to operate another (5 years prior)
2. Subjective Test: not essentially equivalent to a dividend, genuine contraction, not sale of excess inventory

6

Taxes:
Corporate Redemptions & Liquidations
Redemption used to pay death taxes

Redemption used to pay death taxes
- may be treated as a sale & no additional tax due if:
1. stock held by decedent 35%+
2. limited to federal & state death tax and funeral and admin expenses

7

Taxes:
Corporate Redemptions & Liquidations
Stock Distributions

Stock Distributions
- not taxable to shareholder if no option to receive property instead of stock
- Stock bailout treated as dividend to extent of E&P

8

Taxes:
Corporate Redemptions & Liquidations
Corporate Liquidations

Corporate Liquidations
- complete dissolution of corp and distribution of remaining assets
- shareholders get assets in return for cancelling shares
Shareholders Recognize Gain or Loss
= FMV distribution - adj basis shares - tax paid by corp
- any gain/loss will be capital
- if distribution subject to liability, reduce FMV
- adj basis of property received = FMV - tax paid by corp - liability assumed
Corporation will Recognized Gain or Loss
= FMV distribution - adj basis distribution
- nature of gain/loss depends on nature of asset
- FMV cannot be less than liabilities given
- expenses deducted on last corp return
- loss on distribution in complete liquidation to shareholder owning more than 50%, loss not recognized if:
- distribution of each asset not pro rata
- or disqualified (property acquired in tax-free incorporation or capital contribution 5 years prior)
Built In Losses
- disallowed if purpose was to recognize loss
- transfer occurs within 2 years plan of liquidation
- any decline in value after contribution is okay
Subsidiaries
- NO gain or loss recognized if
- parent owns 80%+ voting stock
- distribute assets within current year
- parent taxes carryover basis
- minority shareholders recognize gain or loss

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