Lecture Taxation of individuals and business entities 2015 (6/e) - Chapter 18: Corporate taxation: Nonliquidating distributions

Chapter 18 - Corporate taxation: Nonliquidating distributions. In this chapter, the learning objectives are: Explain how distributions from a corporation are taxed to a shareholder, compute earnings and profits to determine shareholder dividend income and stock basis, describe “constructive” dividends,. | Chapter 18 Corporate Taxation: Nonliquidating Distributions Learning Objectives Explain how distributions from a corporation are taxed to a shareholder Compute earnings and profits to determine shareholder dividend income and stock basis Describe “constructive” dividends Explain tax treatment of stock dividends Describe the tax treatment of stock redemptions Contrast partial liquidations with stock redemptions Framework for Property Distributions Distributions to shareholders will be taxed in one of the following ways: Taxed as income (albeit at a lower tax rate). Return of capital. Capital gains. When distributions from corporations are taxed to shareholders, this creates double taxation of corporate income. Framework for Property Distributions Some payments to shareholders are deductible by the corporation Examples are payments for services (salary), interest, and rent To be deductible, payments to shareholders must be reasonable in amount Unreasonable payments (., excessive . | Chapter 18 Corporate Taxation: Nonliquidating Distributions Learning Objectives Explain how distributions from a corporation are taxed to a shareholder Compute earnings and profits to determine shareholder dividend income and stock basis Describe “constructive” dividends Explain tax treatment of stock dividends Describe the tax treatment of stock redemptions Contrast partial liquidations with stock redemptions Framework for Property Distributions Distributions to shareholders will be taxed in one of the following ways: Taxed as income (albeit at a lower tax rate). Return of capital. Capital gains. When distributions from corporations are taxed to shareholders, this creates double taxation of corporate income. Framework for Property Distributions Some payments to shareholders are deductible by the corporation Examples are payments for services (salary), interest, and rent To be deductible, payments to shareholders must be reasonable in amount Unreasonable payments (., excessive salary) are taxed as “constructive” dividends to shareholders. Constructive Dividends Examples of constructive dividends Unreasonable compensation Shareholder use of corporate assets without an arm’s-length payment Interest paid to shareholder at excessive interest rates Payments made by the corporation on behalf of a shareholder Overview of distributions: Dividend distributions are included in the shareholder’s gross income Non-dividend distributions are a return of capital (reduce the shareholder’s tax basis in the corporation’s stock) Non-dividend distributions in excess of the shareholder’s stock tax basis constitute a gain from sale or exchange of the stock Computing Earnings and Profits A “dividend” for tax purposes is: any distribution of property made by a corporation to its shareholders out of its earnings and profits (E&P) Two separate E&P accounts to be maintained Current earnings and profits (CE&P) Accumulated earnings and profits (AE&P) Undistributed current E&P is added to .

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