Start Chapter 18 corporate taxation nonliquidating distributions

Chapter 18 corporate taxation nonliquidating distributions

The corporate-level tax consequences of a nonliquidating corporate distribution depend on whether the distribution consists of cash or property (other than cash). The form breaks total distributions down into taxable and nontaxable categories.

Shareholders recognize a taxable dividend to the extent a distribution is paid out of corporate earnings and profits (E&P).

If the distribution exceeds E&P, the excess reduces the shareholder's stock basis.

Distributions of a C corporation's own stock to its shareholders (stock dividends) are generally tax-free to the recipient shareholders (Sec. The term "stock" includes rights to acquire such stock.

Tax-free treatment apparently applies to unissued and treasury stock, as well as common, preferred, voting, or nonvoting stock.

Despite this general rule, stock dividends can be taxable if (Sec.

305(b)): If a shareholder has stock redemption rights at a time when a stock dividend is declared, this may be construed as an option to receive cash or other property, which could render the stock dividend taxable (see Rev. 83-68 and 90-98; however, in IRS Letter Ruling 9709044, the IRS concluded that the shareholders' ongoing right of redemption did not result in a stock split's being taxed to the shareholders). If the new stock is not identical to the old stock (e.g., preferred stock distributed for shares of common stock), the basis of the old stock is allocated between the old and new stock based on their respective share of the total FMV of both types of stock.

At the corporate level, a nonliquidating corporate distribution can also have varying tax consequences.

The distribution may have no tax effect, or it may trigger corporate-level capital gain and/or ordinary income.

The other shareholders feel that the tracts will appreciate at about the same rate, so they are willing to distribute any of the tracts. ’s shares would be redeemed, and because he is unrelated to the remaining shareholders, the redemption would qualify for stock sale (capital gain) treatment as a complete termination of a shareholder’s interest under Sec. A corporation is generally allowed to recognize tax losses when depreciated property is distributed to shareholders in complete liquidation of the corporation (Sec. cannot deduct a loss on a nonliquidating distribution of depreciated property.

Conversely, if it distributes appreciated property it must recognize gain as if it had sold the property to the shareholder for its FMV.

Any amount in excess of the shareholder's stock basis is capital gain (Secs. The amount of the distribution is decreased (but not below zero) by liabilities assumed by the shareholder (e.g., a mortgage on a distributed piece of real estate).