Cable reported the following items on its current year tax return: Taxable income ,000 Federal income taxes paid 5,000 Current year charitable contributions in excess of 10% limitation 1,000 Net capital loss for current year 2,000 What is Cable’s accumulated earnings and profits at the end of the year? On the date of the distribution, the following data were available: Adjusted basis of land $ 6,500 Fair market value of land 14,000 Mortgage on land 5,000 For the year ended December 31, 2011, Gelt had earnings and profits of ,000 without regard to the dividend distribution. Stock dividends are generally nontaxable to shareholders if two conditions are met: Made with respect to common stock and Pro rata (proportionate interests maintained) Stock Dividend In January 2012, Joan Hill bought one share of Orban Corp. On March 1, 2012, Orban distributed one share of preferred stock for each share of common stock held. On March 1, 2012, Joan’s one share of common stock had a fair market value of 0, while the preferred stock had a fair market value of 0. After the distribution of the preferred stock, Joan’s bases for her Orban stocks are Common Preferred a. Accordingly, Pike will distribute cash of 0,000 in redemption of all of the stock owned by Mark. Ownership is determined using the §267(c) attribution rules.
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The amount of\r\ndividend income taxable to the stockholder in 2011 is\r\na. Cable\r\nreported the following items on its current year tax return:\r\n\t Taxable income \t\t\t\t$50,000\r\n\t Federal income taxes paid \t\t\t 5,000\r\n\t Current year charitable contributions in excess\r\n\tof 10% limitation \t\t\t\t 1,000\r\n\t Net capital loss for current year \t\t 2,000\r\n What is Cable\u2019s accumulated earnings and profits at the end\r\nof the year? If Mark\u2019s adjusted\r\nbasis for his stock at date of redemption is $300,000, what\r\nwill be the tax effect of the redemption to Mark? \r\n\r\n< 50%\r\n\r\n< 80% x 60% = < 48%\r\n\r\n Stock Redemptions\r\n\r\n If the redemption is treated as an exchange\r\n\r\n Gain is always recognized.\r\n\r\n Loss is recognized unless the shareholder is a related person to the corporation (\u00a7267) \u2013 Shareholder owns more than 50% of the stock\u2019s value.\r\n Ownership is determined using the \u00a7267(c) attribution rules.\r\n\u201c Family\u201d attribution now includes the taxpayer\u2019s brothers and sisters, spouse, ancestors, and lineal descendents.\r\n The basis of the property received is fair market value.\r\n\r\n Stock Redemptions\r\n\r\n Stock Redemptions\r\n\r\n Tax Consequences to the Distributing Corporation\r\n\r\n If the redemption is a dividend, then E& P is reduced by the cash and fair market value of other property distributed.\r\n If the redemption is an exchange, E& P is reduced by the percentage of stock redeemed, not to exceed the fair market value of the property distributed.\r\n E& P is reduced by dividends before reducing E& P for redemptions treated as exchanges.\r\n\r\n\u00a7312(n)(7) example\r\n\r\n\t Spartan Inc. The stock redeemed represents 25% of Spartan stock.
The\r\nfollowing information pertains to Kent:\r\n\t Reed\u2019s basis in Kent stock at January 1, 2011 \t\t$500,000\r\n\t Accumulated earnings and profits at January\r\n\t\t1, 2011 \t\t\t\t\t\t 125,000\r\n\t Current earnings and profits for 2011 \t\t\t 60,000\r\n What was taxable as dividend income to Reed for 2011? On December 1, 2011, Gelt Corporation declared a\r\ndividend and distributed to its sole shareholder a parcel of\r\nland that was not an inventory asset. $ 6,500\t\t(-$6,500 AB $5,000 mortg.) = -$1,500\r\nc. $14,000\t( $7,500 gain - $14,000 FMV $5,000 mortg.) = -$1,500\r\n\r\n Stock Dividends\r\n\r\n A stock dividend increases the number of shares outstanding and thereby reduces the (value) price per share.\r\n Most stock dividends take the form of a stock split, such as a 2-for-1 stock dividend.\r\n Stock dividends are generally nontaxable to shareholders if two conditions are met:\r\n Made with respect to common stock and\r\n Pro rata (proportionate interests maintained)\r\n\r\n Stock Dividend\r\n\r\n In January 2012, Joan Hill bought one share of Orban\r\n Corp. On March 1, 2012, Orban distributed\r\none share of preferred stock for each share of common stock\r\nheld. On March 1, 2012,\r\n Joan\u2019s one share of common stock had a fair market value of\r\n$450, while the preferred stock had a fair market value of\r\n$150.\r\n\r\n14.
If these payments are unreasonable, then the unreasonable (excessive) portion may be treated as a constructive dividend and the payment is no longer deductible. $(57,000) Ordering of E&P Distributions Positive Current E&P and Positive Accumulated E&P Positive current E&P, negative accumulated E&P Negative current E&P, positive accumulated E&P Negative current E&P, negative accumulated E&P Determining the Dividend Taxable dividend 85. The following information pertains to Kent: Reed’s basis in Kent stock at January 1, 2011 $500,000 Accumulated earnings and profits at January 1, 2011 125,000 Current earnings and profits for 2011 60,000 What was taxable as dividend income to Reed for 2011? ^ E&P should be apportioned on a daily basis, but for our purposes you can use months. Individuals prefer exchange treatment because of the ability to recover their stock basis. Stock ownership tests must be met for treatment as substantially disproportionate under Sec.
Constructive Dividends Examples of disguised (constructive) dividends – Unreasonable compensation Bargain sales of property to shareholders Shareholder use of corporate assets without an arm’s-length payment Loans from shareholders at excessive interest rates Corporate payments of the shareholder’s personal expenses Constructive Dividend 90. Determining the Dividend Tax Consequences to a Corporation Paying Noncash Property as a Dividend The corporation recognizes gains (but not losses) on the distribution of noncash property as a dividend Gain is recognized to the extent of fair market value in excess of tax basis in the property Liabilities If the property’s fair market value is less than liabilities assumed by the shareholder, the fair market value is deemed to be the liability Determining the Dividend Loss Recognition 87. $0 Example 1 Cher Holder receives a property distribution from Sunny Corporation with a fair value of $200. Corporate shareholders prefer dividend treatment because of the dividends received deduction. 302(b)(2): The shareholder owns less than 50 percent of the voting power immediately after the exchange The shareholder’s percentage of voting stock and aggregate value after the redemption is less than 80 percent of the percentage before the redemption In computing the percentage ownership tests, constructive ownership rules under Sec.
The amount of\r\ndividend income taxable to the stockholder in 2011 is\r\na.