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Stock Distributions Tx 8120

Stock Distributions Tx 8120. Achievement Goals. Describe consequences of ______ distributions and Determine the impact of stock _______ on shareholders. You should be able to:. Non-Liquidating Distributions. Property Distribution. Stock Distribution. Stock Redemption. Shareholders.

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Stock Distributions Tx 8120

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  1. Stock DistributionsTx 8120

  2. Achievement Goals • Describe consequences of ______ distributions and • Determine the impact of stock _______ on shareholders. You should be able to:

  3. Non-Liquidating Distributions Property Distribution Stock Distribution Stock Redemption Shareholders Shareholders Shareholders Property Stock Stock Property Corporation Corporation Corporation Shareholder (distributee) Issues Corporation (distributor) Issues 1. How much gain or loss do shareholders recognize? 2. What basis do shareholders take in stock received? 3. When does the holding period begin in stock received? 1. How much gain or loss does the corporation recognize? 2. How is the corporation’s E&P affected?

  4. Section 317(a) (a) Property. For purposes of this part, the term “property” means money, securities, and any other property; except that such term does not include stock in the corporation making the distribution (or rights to acquire such stock). Stock includes: (1) ______ in distributor and (2) ______ _______ in distributor Shareholders Stock Corporation

  5. Historical Perspective • U.S. Constitution, ____ Amendment, allowed Congress to tax income. • Revenue Act of ____ required taxation of all dividends. • Eisner v. Macomber (S.Ct., 1920) held ______ stock dividends on ______ stock were not income. • Revenue Act of ____ said stock dividends were not taxable.

  6. Shareholder issues Gain or loss recognized Section 305(a) (a) General rule. Except as provided in this section, gross income does not include the amount of any distribution of the stock of a corporation made by such corporation to its shareholders with respect to its stock. Distributions in which ______________ interests do not change are nontaxable. Shareholders (a) Pro rata C.S. dividend on ____ (b) Pro rata ____ dividend on C.S. where no ____ previously outstanding Stock Corporation

  7. Shareholder issues Gain or loss recognized Section 305(b)(1) (b) Exceptions. Subsection (a) shall not apply to a distribution by a corporation of its stock, and the distribution shall be treated as a distribution of property to which section 301 applies-- (1) Distributions in lieu of money. If the distribution is, at the election of any of the shareholders (whether exercised before or after the declaration thereof), payable either-- Shareholders (A) in its stock, or (B) in property. Stock or Property Corporation

  8. Shareholder issues Gain or loss recognized Dividend Reinvestment Plans Shareholders Cash Option Shares Worth _____ of Cash Option Corporation DRIPs give shareholders a choice between: (1) ____ distributions or (2) Additional _______ worth slightly more than cash option.

  9. Shareholder issues Gain or loss recognized Choice for Some, But Not Others Shareholders Owning ≥ 800 Shares Shareholders Owning < 800 Shares Corporation Assume a corporation with only one class of common stock declares a 4-for-1 stock split and that shareholders holding at least 800 shares can receive corporate bonds in lieu of additional shares.

  10. Shareholder issues Gain or loss recognized Almost Identical Classes Class A Shareholders Class B Shareholders Corporation Assume a corporation has two classes of common stock possessing identical rights except dividends to Class A owners must be paid in cash while dividends to Class B owners must be paid in additional shares.

  11. Shareholder issues Gain or loss recognized Section 305(b)(2) (b) Exceptions. Subsection (a) shall not apply to a distribution by a corporation of its stock, and the distribution shall be treated as a distribution of property to which section 301 applies-- (2) Disproportionate distributions. If the distribution (or a series of distributions of which such distribution is one) has the result of-- Shareholders (A) the receipt of property by some shareholders, and (B) an increase in the proportionate interests of other shareholders in the assets or earnings and profits of the corporation. Property or Interests Corporation

  12. Shareholder issues Gain or loss recognized Increase in Proportionate Interest? Common Shareholders Preferred Stock Corporation If common shareholders receive a pro rata distribution of preferred stock, do they increase their proportionate interests vis-à-vis the preferred shareholders?

  13. Shareholder issues Gain or loss recognized Increase in Proportionate Interest? Preferred Shareholders Preferred Stock Corporation If preferred shareholders receive a pro rata distribution of preferred stock, do they increase their proportionate interests vis-à-vis the common shareholders?

  14. Shareholder issues Gain or loss recognized Increase in Proportionate Interest? Preferred Shareholders Common Stock Corporation If preferred shareholders receive a pro rata distribution of common stock, do they increase their proportionate interests vis-à-vis the common shareholders?

  15. Shareholder issues Gain or loss recognized Increase in Proportionate Interest? Common Shareholders Common Stock Corporation If common shareholders receive a pro rata distribution of common stock, do they increase their proportionate interests vis-à-vis the preferred shareholders?

  16. Shareholder issues Gain or loss recognized Section 305(b)(3) (b) Exceptions. Subsection (a) shall not apply to a distribution by a corporation of its stock, and the distribution shall be treated as a distribution of property to which section 301 applies-- (3) Distributions of common and preferred stock. If the distribution (or a series of distributions of which such distribution is one) has the result of-- Common Shareholders (A) the receipt of preferred stock by some common shareholders, and (B) the receipt of common stock by other common shareholders. Common Stock or Preferred Stock Corporation

  17. Shareholder issues Gain or loss recognized Section 305(b)(4) (b) Exceptions. Subsection (a) shall not apply to a distribution by a corporation of its stock, and the distribution shall be treated as a distribution of property to which section 301 applies-- (4) Distributions on preferred stock. If the distribution is with respect to preferred stock, other than an increase in the conversion ratio of convertible preferred stock made solely to take account of a stock dividend or stock split with respect to the stock into which such convertible stock is convertible. Preferred Shareholders Stock Corporation

  18. Shareholder issues Gain or loss recognized Section 305(b)(5) (b) Exceptions. Subsection (a) shall not apply to a distribution by a corporation of its stock, and the distribution shall be treated as a distribution of property to which section 301 applies-- (5) Distributions of convertible preferred stock. If the distribution is of convertible preferred stock, unless it is established to the satisfaction of the Secretary that such distribution will not have the result described in paragraph (2). Shareholders Convertible Preferred Stock Corporation

  19. Summary: Taxable v. Nontaxable • Based on _________ ______ concept, stock dividends are nontaxable, §305(a). • Exceptions, §305(b) • Shareholder _____ between property or stock • ________________ distributions • ______ shares to some common shareholders, __________ shares to others • Distributions to ___________ shareholders • Distributions of convertible __________

  20. Dichotomizing Stock Distributions Nontaxable Stock Distribution, §305(_) Taxable Stock Distribution, §305(_) Shareholders Treat generally as ________ distribution. Stock Corporation

  21. Shareholder issues Nontaxable stock distribution Basis of shares received Section 307(a) (a) General rule.--If a shareholder in a corporation receives its stock or rights to acquire its stock (… “new stock”) in a distribution to which section 305(a) applies, then the basis of such new stock and of the stock with respect to which it is distributed (… “old stock”), respectively, shall, in the shareholder’s hands, be determined by allocating between the old stock and the new stock the adjusted basis of the old stock. Shareholders Stock Corporation

  22. Shareholder issues Nontaxable stock distribution Holding period of shares received Section 1223(5) (5) In determining the period for which the taxpayer has held stock or rights to acquire stock received on a distribution, if the basis of such stock or rights is determined under section 307 …, there shall … be included the period for which he held the stock in the distributing corporation before the receipt of such stock or rights upon such distribution. Shareholders Stock Corporation

  23. Corporate issues Nontaxable stock distribution Gain or loss recognized Section 311(a) (a) General rule. Except as provided in subsection (b), no gain or loss shall be recognized to a corporation on the distribution (not in complete liquidation) with respect to its stock of-- (1) its stock (or rights to acquire its stock), or (2) property. Shareholders Stock Corporation

  24. Corporate issues Nontaxable stock distribution E&P impact Section 312(d)(1)(B) (d) Certain distributions of stock and securities.-- (1) In general.--The distribution to a distributee by or on behalf of a corporation of its stock or securities, of stock or securities in another corporation, or of property, in a distribution to which this title applies, shall not be considered a distribution of the earnings and profits of any corporation-- Shareholders (B) if the distribution was not subject to tax in the hands of such distributee by reason of section 305(a). Stock Corporation

  25. Nontaxable Stock Distributions§305(a) • Shareholders reallocate basis of prior shares between “new” and “old” shares based on ________ ____. • Holding period of prior shares ______ to “new” shares. • Distributor recognizes no gain or loss from issuing ____ shares. • _____ is not affected.

  26. Shareholder issues Taxable stock distribution Gain or loss recognized Section 301(b)(1) (b) Amount distributed. (1) General rule. For purposes of this section, the amount of any distribution shall be the amount of money received, plus the fair market value of the other property received. Shareholders Stock Corporation

  27. Shareholder issues Taxable stock distribution Basis of shares received Section 301(d) (d) Basis. The basis of property received in a distribution to which subsection (a) applies shall be the fair market value of such property. Shareholders Stock Corporation

  28. Shareholder issues Taxable stock distribution Holding period of shares received Section 1223(2) For purposes of this subtitle-- (2) In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under this chapter such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person. Shareholders Stock Corporation

  29. Corporate issues Taxable stock distribution Gain or loss recognized Section 311(a) (a) General rule. Except as provided in subsection (b), no gain or loss shall be recognized to a corporation on the distribution (not in complete liquidation) with respect to its stock of-- (1) its stock (or rights to acquire its stock), or (2) property. Shareholders Stock Corporation

  30. Corporate issues Taxable stock distribution E&P impact Section 312(d)(1)(A) (d) Certain distributions of stock and securities.-- (1) In general.--The distribution to a distributee by or on behalf of a corporation of its stock or securities, of stock or securities in another corporation, or of property, in a distribution to which this title applies, shall not be considered a distribution of the earnings and profits of any corporation-- Shareholders (A) if no gain to such distributee from the receipt of such stock or securities, or property, was recognized under this title …. Stock Corporation

  31. Taxable Stock Distributions§305(b) • Shareholders treat FMV of “new” shares as ____________ distribution. • Shareholders receive dividend to extent of ____. • Shareholders take _____ basis in “new” shares. • Holding period of “new” shares starts when __________. • Distributor recognizes no gain or loss from issuing ___ shares. • E&P reduced by ____ of “new” shares, §312(b)(2).

  32. Summary of Stock Distributions

  33. Lind et al., pp. 308-309part (a) This stock distribution is: Nontaxable since proportionate interests do not change, §305(a) Taxable since one or more SHs can choose between property or stock, §305(b)(1) Taxable since some SHs receive property while others increase proportionate interest, §305(b)(2) Taxable since some common SHs receive C.S. while other common SHs receive P.S., §305(b)(3) Taxable since preferred SHs receive distribution (exception for change in conversion ratio), §305(b)(4) Taxable since convertible P.S. is distributed (exception if proportionate interests unlikely to change, §305(b)(5) Frank (Class A: 100 shares) Fay (Class B: 50 shares) Joyce (Class B: 50 shares) 200 shares of nonconvertible P.S. 100 shares of nonconvertible P.S. 100 shares of nonconvertible P.S. Hill Corporation Class A voting common Class B voting common Ample E&P Each class A share possesses the same claim on earnings, claim on assets, and voting rights as each class B share.

  34. Lind et al., pp. 308-309part (b) Is the distribution taxable to: Joyce? Fay? Frank? Frank (Class A: 100 shares) Fay (Class B: 50 shares) Joyce (Class B: 50 shares) 10 shares of class A common stock 5 shares of class B or cash (picks stock) 5 shares of class B or cash (picks cash) Hill Corporation Class A voting common Class B voting common Ample E&P Each class A share possesses the same claim on earnings, claim on assets, and voting rights as each class B share.

  35. Lind et al., pp. 308-309part (c) Is the distribution taxable to: Joyce? Fay? Frank? Frank (Class A: 100 shares) Fay (Class B: 50 shares) Joyce (Class B: 50 shares) Prorata distribution of class A stock Pro rata cash distribution Pro rata cash distribution Hill Corporation Class A voting common Class B voting common Ample E&P Each class A share possesses the same claim on earnings, claim on assets, and voting rights as each class B share.

  36. Lind et al., pp. 308-309part (d) How does Frank treat this distribution? Nontaxable since proportionate interests do not change, §305(a) Taxable since one or more SHs can choose between property or stock, §305(b)(1) Taxable since some SHs receive property while others increase proportionate interest, §305(b)(2) Taxable since some common SHs receive C.S. while other common SHs receive P.S., §305(b)(3) Taxable since preferred SHs receive distribution (exception for change in conversion ratio), §305(b)(4) Taxable since convertible P.S. is distributed (exception if proportionate interests unlikely to change, §305(b)(5) Frank (Class A: 100 shares) Fay (Class B: 50 shares) Joyce (Class B: 50 shares) Class B shares Hill Corporation Class A voting common Class B nonconvertible 5% preferred Ample E&P

  37. Lind et al., pp. 308-309part (e) How does Frank treat this distribution? Nontaxable since proportionate interests do not change, §305(a) Taxable since one or more SHs can choose between property or stock, §305(b)(1) Taxable since some SHs receive property while others increase proportionate interest, §305(b)(2) Taxable since some common SHs receive C.S. while other common SHs receive P.S., §305(b)(3) Taxable since preferred SHs receive distribution (exception for change in conversion ratio), §305(b)(4) Taxable since convertible P.S. is distributed (exception if proportionate interests unlikely to change, §305(b)(5) Frank (Class A: 100 shares) Fay (Class B: 50 shares) Joyce (Class B: 50 shares) Class C nonconvertible preferred with rights subordinate to class B stock Hill Corporation Class A voting common Class B nonconvertible 5% preferred Ample E&P

  38. Lind et al., pp. 308-309part (f) How does Frank treat this distribution? Nontaxable since proportionate interests do not change, §305(a) Taxable since one or more SHs can choose between property or stock, §305(b)(1) Taxable since some SHs receive property while others increase proportionate interest, §305(b)(2) Taxable since some common SHs receive C.S. while other common SHs receive P.S., §305(b)(3) Taxable since preferred SHs receive distribution (exception for change in conversion ratio), §305(b)(4) Taxable since convertible P.S. is distributed (exception if proportionate interests unlikely to change, §305(b)(5) Frank (Class A: 100 shares) Debenture Holders Class A shares Annual 10% interest payment Hill Corporation Class A voting common 10% debentures convertible into common Ample E&P Conversion ratio is one common share for $1,000 debenture

  39. Lind et al., pp. 308-309part (g) How does Frank treat this distribution? Nontaxable since proportionate interests do not change, §305(a) Taxable since one or more SHs can choose between property or stock, §305(b)(1) Taxable since some SHs receive property while others increase proportionate interest, §305(b)(2) Taxable since some common SHs receive C.S. while other common SHs receive P.S., §305(b)(3) Taxable since preferred SHs receive distribution (exception for change in conversion ratio), §305(b)(4) Taxable since convertible P.S. is distributed (exception if proportionate interests unlikely to change, §305(b)(5) Frank (Class A: 100 shares) Preferred Shareholders 2-for-1 stock split Annual 10% cash dividend Hill Corporation Class A voting common Convertible 10% preferred Ample E&P Conversion ratio is one common share for four preferred

  40. Lind et al., pp. 308-309part (h) This stock distribution is: Nontaxable since proportionate interests do not change, §305(a) Taxable since one or more SHs can choose between property or stock, §305(b)(1) Taxable since some SHs receive property while others increase proportionate interest, §305(b)(2) Taxable since some common SHs receive C.S. while other common SHs receive P.S., §305(b)(3) Taxable since preferred SHs receive distribution (exception for change in conversion ratio), §305(b)(4) Taxable since convertible P.S. is distributed (exception if proportionate interests unlikely to change, §305(b)(5) Frank (Class A: 100 shares) Fay (Class B: 50 shares) Joyce (Class B: 50 shares) Prorata distribution of class A stock Prorata distribution of nonconvertible P.S. Prorata distribution of nonconvertible P.S. Hill Corporation Class A voting common Class B voting common Ample E&P Each class A share possesses the same claim on earnings, claim on assets, and voting rights as each class B share.

  41. Lind et al., pp. 308-309part (i) This stock distribution is: Nontaxable since proportionate interests do not change, §305(a) Taxable since one or more SHs can choose between property or stock, §305(b)(1) Taxable since some SHs receive property while others increase proportionate interest, §305(b)(2) Taxable since some common SHs receive C.S. while other common SHs receive P.S., §305(b)(3) Taxable since preferred SHs receive distribution (exception for change in conversion ratio), §305(b)(4) Taxable since convertible P.S. is distributed (exception if proportionate interests unlikely to change, §305(b)(5) Frank (Class A: 100 shares) Fay (Class B: 50 shares) Joyce (Class B: 50 shares) Convertible into 5 class B shares any time within 20 years Prorata distribution of 10 class A shares Prorata distribution of convertible P.S. Prorata distribution of convertible P.S. Hill Corporation Class A voting common Class B voting common Ample E&P Each class A share possesses the same claim on earnings, claim on assets, and voting rights as each class B share.

  42. Shareholder issues Nontaxable stock rights Basis of rights received Section 307(b)(1) (b) Exception for certain stock rights. (1) In general. If-- (A) a corporation distributes rights to acquire its stock to a shareholder in a distribution to which section 305(a) applies, and (B) the fair market value of such rights at the time of the distribution is less than 15 percent of the fair market value of the old stock at such time, then subsection (a) shall not apply and the basis of such rights shall be zero, unless the taxpayer elects … to determine the basis of the old stock and of the stock rights under the method of allocation provided in subsection (a). Shareholders Stock Rights Corporation

  43. Shareholder issues Nontaxable stock rights Basis of rights received Stock Rights: Planning Even when the ___ of stock rights received < ___% of the old stock’s ___, the shareholder expecting to sell the rights may ____ to allocate some basis to the rights to minimize capital gain. Shareholders Stock Rights Corporation

  44. Summary of Stock Right Distributions

  45. Reg. §1.307-1(a) Disposition of Stock Rights If the shareholder Then 1. Sells rights Selling price less _________ basis equals gain or loss 2. Exercises rights __________ basis adds to cost of new shares 3. Allows rights to lapse _________ basis reverts to original shares

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