Non Liquidating Distribution of Corporation

Chapter 4 – Non-Liquidating Distribution of Corporations

Types of NLD:

1. Distribution of property or cash

                        *Not used for stock exchange

2. Distribution of stocks of the corporation (dividend stock)
3. Distribution of property or cash (exchange to stock redemption)

Distribution

            Dividents à corp. extent in profit and earning (E&P)

• non-corporate taxpayer ( 20% tax = capl. gain rate)

            Exceeding (E&P)

• capital return
• capital gain

Earning and Profits (E&P)

[1] life insurance proceed, tax exempt interest

[2] plus or minus of (E&P and Tax)

[3] org expense deduction, dividends collected deductions

[4] NOL, charity, cap loss

[5] tax exempt expense, keyman life ins, pol. vontributions, penalties

E&P Distribution

• Made fist out of recent E&P then amassed E&P
• If corporation has +CEP
  • Divided to CEP extend even if:

*aEP is deficit (applies to nimble dividend rule)

• Distribution reduce E&P
  • Not below to zero, and or;
  • Increase deficit
  • AEP end of year = aep prior year +CEP – dividend value

Ordering rules multiple distributions

• ceP = proportionally allocated based on distributions
• aEP = chronological allocation
  • note: same day distribution
• should be allocated using E&P rule

Property Distribution

Non-taxable stock dividends

1. Total amount of basis should be allocated before
2. distribution of new and old shared

                                                and if dividend is different stock class

                                                            *should be allocated as to FMV

2. Holding period is tacked
3. No impact with corp

                        – NO GAIN/LOSS

                        – NO E&P IMPACT

Taxable Dividends

• Only taxable if shareholder proportionate interest
  • Can elect to take prop. or stock
  • Some shareholders receive stock/property
  • Some shareholders receive preferred/ common
  • Distribution on pref. stock
    • Not OF
  • Distribution OF pref. stock convertible

Rules of Attribution

• Own constructively stock by means of:
  • Spouse
  • Child
  • No double attribution in family
  • Grandchild
  • Parent

*not : grandparents, brothers, sisters

Rules of Attribution (Entity)

• Attribute stock by estate to partner proportinally
• Attribute stock by C Corp to SH

*ONLY            if SH owns >50%                     

Susbstantially Disproportionate

1. Vote <50%
2. Voting stock <80%
3. Common Owned <80%

Absolute Termination

1. Use attribution rules, waive if:

            – No interest attained except being creditor

            – IRS file written aggreement notifies any acquired interest

            – 10 years after redemption cant be acquired besides inheritance

                        In 10 years:

• Stock is not acquired by redeemed SH
• No stock is attributable to the stock of redeemed SH
• No tax purpose make it non-applicable

NEED (Not essentially equivalent to dividend)

• Should be meaninful reduction (earnings, liquidation, earnings)
• Circumstances and facts
• Davis case
• No control
• Application of attribution rules
• Lose control = NEED

Partial Liquidation

• Discontinued line of business
• Should be bonafide business contraction
• At corporate level (not essentially equivalent with dividend)
• Only applicable in shareholders who are non-corporate

Redemption Analysis

1. Is redemption present? If yes, use option 2
2. Does redemption applies any categoris for exchange? If no, distribution rules is applied. If yes, sale rules are used, requirements:

• Disproportionate on substantial leve
• Absolute termination
• Not equal to dividend (essentially)
• Liquidation should be partial

Tax Treatment (Redemption)