Term
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Definition
a. Without Sec. 351, any gain realized on the transfer of property to a corporation for stock of the corporation would be recognized.
b. Sec. 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and, immediately after the exchange, such person or persons control the corporation. This nonrecognition treatment is mandatory, not elective. |
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Term
| FORMATION - Section 351 - Control |
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Definition
| Control is ownership of 80% or more of the voting power of stock and 80% or more of the shares of each class of nonvoting stock of the corporation. |
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Term
| FORMATION - Section 351 - Solely for Stock |
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Definition
| To the extent the shareholder receives the corporation’s stock in exchange for property, nonrecognition is required. This is so even if the shareholder receives some boot (money or other property) in the exchange. |
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Term
| FORMATION - Section 351 - Boot |
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Definition
| The shareholder recognizes gain realized to the extent of money and the FMV of other property (except the stock of the corporation) received in the exchange. |
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Term
| FORMATION - Section 351 - Liabilities |
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Definition
| Sec. 351 applies even if the corporation assumes the shareholder’s liability or takes property subject to a liability in the exchange. |
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Term
| FORMATION - Basis of Shareholder in Stock |
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Definition
| A control group shareholder’s basis in the stock of the corporation is the adjusted basis in contributed property adjusted for the boot received and the gain recognized. |
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Term
| FORMATION - Basis of Shareholder in Boot |
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Definition
| Boot generally has a basis equal to fair market value. |
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Term
| FORMATION - Basis of Corporation in Property |
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Definition
| The corporation’s initial carryover basis in property exchanged by a control group shareholder for its stock is an adjusted carryover basis. |
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Term
| CURRENT EARNINGS AND PROFITS - Definition |
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Definition
| The term “earnings and profits (E&P)” is the federal tax accounting version of financial accounting’s retained earnings. Though similar in purpose, they are not the same amount. The E&P measures the ability of a corporation to pay a dividend. |
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Term
| DISTRIBUTIONS - Definition |
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Definition
| A distribution is any transfer of property by a corporation to any of its shareholders with respect to the shareholder’s shares in the corporation. Property is defined as money, bonds or other obligations, stock in other corporations, and other property, including receivables. |
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Term
| DISTRIBUTIONS - Corporate Treatment |
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Definition
A corporation is required to file a Form 1099-DIV no later than February 28 of the following year for each shareholder if the corporation did any of the following:
1) Paid gross dividends of $10 or more during the calendar year
2) Withheld any federal income taxes under the backup withholding rules
3) Made payments of $600 or more as part of a liquidation |
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Term
| DISTRIBUTIONS - Corporate Treatment - Corporate loss unrecognized |
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Definition
| No loss realized on an ordinary distribution of property (AB > FMV) may be recognized. The shareholder takes a FMV basis in the property. |
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Term
| DISTRIBUTIONS - Corporate Treatment - Corporate gain recognized |
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Definition
| Gain realized on distributed property must be recognized by the corporation as if the property were sold to the distributee at its FMV. But no gain is recognized to the corporation on distribution of money or obligations it issues, e.g., bonds. |
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Term
| DISTRIBUTIONS - Shareholder Treatment - Dividend |
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Definition
| The amount of a distribution is a dividend to the extent, first, of any current E&P and then of any accumulated E&P (acc. E&P). |
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Term
| DISTRIBUTIONS - Shareholder Treatment - Capital Recovery |
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Definition
| A shareholder treats the amount of a distribution in excess of dividends as tax-exempt return of capital to the extent of his/her basis. |
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Term
| DISTRIBUTIONS - Shareholder Treatment - Gain on sale |
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Definition
| Any excess of the amount of a distribution over E&P and basis is treated as gain on the sale of the stock |
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Term
| DISTRIBUTIONS - Shareholder Treatment - Basis in distributed property |
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Definition
The shareholder’s basis in property received in a
nonliquidating distribution is generally its FMV at the time of the distribution. |
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Term
| DISTRIBUTIONS - Extraordinary Dividend |
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Definition
a. Additional gain may be recognized by a shareholder who sells stock on which an extraordinary dividend was received.
b. An extraordinary dividend is a dividend on stock held 2 years or less that exceeds 10% (5% for preferred stock) of either the basis or the FMV of the stock.
c. Basis in the stock is reduced by the nontaxed portion of the extraordinary dividend, i.e., the amount of a DRD (dividends-received deduction).
d. If the nontaxed portion of the dividend exceeds the stock’s basis, the excess is treated as a gain from the sale or exchange of such stock in the year the extraordinary dividend is received. |
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Term
| DISTRIBUTIONS - Stock Distributions |
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Definition
A corporation recognizes no gain or loss on distribution of its own stock. Generally, a shareholder does not include a distribution of stock or rights to acquire stock in gross
income unless it is a
1) Distribution in lieu of money (treated as a dividend)
2) Disproportionate distribution
3) Distribution of preferred stock
4) Distribution of convertible preferred stock
5) Distribution of common and preferred stock, resulting in receipt of preferred stock by some shareholders and common stock by other shareholders |
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Term
| DISTRIBUTIONS - Taxable Stock Distribution |
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Definition
a. Distributions of stock described in b. through g. below are subject to tax. Unless otherwise stated in b. through g. below, the amount of a distribution subject to tax is the FMV of distributed stock or stock rights.
b. Any shareholder has an option to choose between a distribution of stock or a distribution of other property. The amount of the distribution is the greater of
1) The FMV of stock or
2) The cash or FMV of other property.
c. Some shareholders receive property, and other shareholders receive an increase in their proportionate interests.
d. Some common shareholders receive common stock; others receive preferred stock.
e. Distribution is on preferred stock.
f. Convertible preferred stock is distributed, and the effect is to change the shareholder’s proportionate stock ownership.
g. Constructive stock distributions change proportionate interests resulting from, e.g., a change in conversion ratio or redemption price.
h. E&P are reduced by the FMV of stock and stock rights distributed.
i. Basis in the underlying stock does not change. Basis in the new stock or stock rights is their FMV.
j. Holding period for the new stock begins on the day after the distribution date.
k. If a distribution of a stock dividend or stock right is taxable when received, the basis is the FMV on the date of acquisition.
1) When the dividend is taxable, there is no tacking on of the holding period for the underlying stock.
2) The holding period begins the day following the acquisition date. |
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Term
| DISTRIBUTIONS - Stock Split |
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Definition
| A stock split is not a distribution. |
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Term
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Definition
a. Stock is redeemed when a corporation acquires its own stock from a shareholder in exchange for property, regardless of redeemed stock being canceled, retired, or held as treasury stock.
b. A shareholder is required to treat amounts realized on a redemption (not in liquidation) either as a distribution (a corporate dividend) or as a sale of stock redeemed. |
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Term
| REDEMPTIONS - Dividend or Sale Treatment |
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Definition
Redemptions of stock by a corporation are treated as dividends unless certain conditions are met. If any of the following conditions are met, the exchange is treated as a sale, and the gains or losses are capital gains and losses.
1) The redemption is not essentially equivalent to a dividend.
2) The redemption is substantially disproportionate.
3) The distribution is in complete redemption of all of a shareholder’s stock.
4) The distribution is to a noncorporate shareholder in partial liquidation.
5) The distribution is received by an estate. |
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Term
| REDEMPTIONS - Realized Gain |
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Definition
| A corporation recognizes gain realized on a distribution |
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Term
| REDEMPTIONS - Loss Recognition |
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Definition
No recognition of loss realized is allowed by the corporation, unless the redemption is
1) In complete liquidation of the corporation or
2) Of stock held by an estate (to pay death taxes). |
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Term
| REDEMPTIONS - Recognition of Depreciated Property Distribution |
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Definition
| A corporation recognizes ordinary income on the distribution of depreciated property to the extent of depreciation or amount realized, whichever is less. |
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Term
| REDEMPTIONS - Shareholder Treatment |
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Definition
A
shareholder
treats a redemption in the same manner as a regular distribution. The amount is a dividend to the extent of E&P. Any unrecovered basis in the redeemed stock is added to the shareholder’s basis in stock retained. |
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Term
| REDEMPTIONS - Stock Reacquisition |
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Definition
| The expenses incurred in connection with any reacquisition by a corporation of its own stock or the stock of a related person (50% relationship test) are not deductible. |
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Term
| REDEMPTIONS - Sale Treatment |
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Definition
| The shareholder treats qualifying redemptions as if the shares redeemed were sold to a third party. |
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Term
| REDEMPTIONS - Termination of Interest |
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Definition
Termination of a shareholder’s interest must be complete to qualify. All the
corporation’s stock owned by the shareholder must be redeemed in the exchange for the property |
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Term
| REDEMPTIONS - Substantially Disproportionate |
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Definition
| Substantially disproportionate means that the amount received by shareholders is not in the same proportion as their stock holdings. |
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Term
| REDEMPTIONS - Equivalency to a Dividend |
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Definition
| Not essentially equivalent to a dividend means that there is a meaningful reduction in the shareholder’s proportionate interest in the corporation. Reduction in voting power is generally required. |
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Term
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Definition
| An estate may treat a qualifying redemption (to pay death taxes) as a sale. |
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Term
| REDEMPTIONS - Constructive Ownership |
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Definition
| The (redeemed) shareholder is treated as owning shares owned by certain related parties, e.g., family members (excluding siblings and grandparents). |
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Term
| COMPLETE LIQUIDATION - Defined |
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Definition
| Under a plan of complete liquidation, a corporation redeems all of its stock in a series of distributions. |
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Term
| COMPLETE LIQUIDATION - Corporate Gains |
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Definition
| A corporation recognizes any gain or loss realized on distributions in complete liquidation as if the property were sold at its FMV to the shareholder immediately before its distribution. |
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Term
| COMPLETE LIQUIDATION - Corporate Losses |
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Definition
| A corporation generally recognizes any losses realized on liquidating distributions. |
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Term
| COMPLETE LIQUIDATION - Shareholder Treatment |
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Definition
| A shareholder treats amounts distributed in complete liquidation as realized in exchange for stock. Capital recovery to the extent of basis is permitted before recognizing gain or loss. |
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Term
| COMPLETE LIQUIDATION - Reporting |
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Definition
A corporation must file an information return (Form 966, Corporation Dissolution or Liquidation
) reporting adoption of a plan or resolution for its dissolution, or partial or complete liquidation, within 30 days of adoption. |
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Term
| PARTIAL LIQUIDATION - Non-corporate Shareholder |
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Definition
| A noncorporate shareholder treats a distribution as a sale to the extent it is (in redemption) in partial liquidation of the corporation. |
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Term
| PARTIAL LIQUIDATION - Corporate Distributor |
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Definition
| The corporation making the distribution recognizes gain but not loss. |
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Term
| PARTIAL LIQUIDATION - Corporate Distributee |
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Definition
| A corporation that receives a distribution in redemption for partial liquidation of another corporation treats the distribution as a dividend to the extent of E&P of the distributing corporation. The distributee corporation is eligible for the dividends received deduction. |
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Term
| PARTIAL LIQUIDATION - Contraction of the Corporation |
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Definition
| Partial liquidation refers to contraction of the corporation. Focus is not on the shareholders but on genuine reduction in size of the corporation. |
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Term
| SUBSIDIARY LIQUIDATION - Nonrecognition |
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Definition
| Neither the parent corporation nor a controlled subsidiary recognizes gain or loss on a liquidating distribution to the parent. |
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Term
| SUBSIDIARY LIQUIDATION - Control |
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Definition
| Control means the parent owns 80% or more of both the voting power and total value of the stock of the liquidating corporation. |
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Term
| SUBSIDIARY LIQUIDATION - Basis |
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Definition
| Basis in property distributed to the parent is transferred to the parent, and basis in stock in the subsidiary disappears. |
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Term
| SUBSIDIARY LIQUIDATION - Liabilities |
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Definition
No gain is recognized on distributions that satisfy obligations of the subsidiary to the
parent. |
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Term
| SUBSIDIARY LIQUIDATION - Tax Attributes |
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Definition
| Tax attributes of the subsidiary, such as NOLs and capital losses, carry over to the parent. Holding period will include that of the subsidiary |
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Term
| SUBSIDIARY LIQUIDATION - Minority Shareholders |
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Definition
| Complete liquidation rules apply to distributions made to shareholders other than the parent. The subsidiary recognizes gain but not losses. The shareholder recognizes gain or loss and takes FMV basis in the property. |
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Term
| REORGANIZATIONS - Overview |
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Definition
| For federal tax purposes, a qualified reorganization of one or more corporations is considered a mere change in form of investment rather than a disposition of assets. For this reason, a general rule of nonrecognition applies to qualifying reorganizations. However, gain is recognized to the extent of boot. |
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Term
| REORGANIZATIONS - Shareholders |
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Definition
In a reorganization, a shareholder recognizes no gain or loss on an exchange of stock
or securities solely for stock or securities in the same or another corporation that is a
party to the reorganization. |
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Term
| REORGANIZATIONS - Transferor Corporation (Acquired or Purchased) |
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Definition
| A corporation that is a party to a reorganization generally recognizes no gain or loss on exchange of property solely for stock or securities of another corporate party. Gain is recognized only on boot not distributed (by the transferee). Liability relief is not boot unless it was for a nonbusiness or tax-avoidance purpose. |
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Term
| REORGANIZATIONS - Transferee Corporation (Acquiring or Purchasing) |
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Definition
a. The transferee corporation recognizes gain only on appreciated property (but not its own stock or securities) exchanged.
b. Basis in property acquired from the transferor is transferred, i.e., the basis of the property
1) In the hands of the transferor corporation, plus
2) Gain recognized by the transferor corporation |
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Term
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Definition
Nonrecognition treatment applies only if the change in corporate structure fits within the definition of one of the following specific reorganization types.
Merger or Consolidation
Stock-for-stock
Stock-for-assets
Division
Recapitalization
Reincorporation
Bankruptcy |
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Term
| REORGANIZATIONS - Nonrecognition Requirements |
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Definition
Nonrecognition applies only to the extent each of several statutory and judicially sourced requirements are met.
1) The reorganization must be pursuant to a plan, a copy of which is filed with the return of each participating corporation.
2) Nonrecognition treatment applies only with respect to distributions in exchange for stock or securities of a corporation that is a party to the reorganization.
3) Business purpose, other than tax avoidance, must be present.
4) Owners of the reorganized enterprise(s) must retain an interest in the continuing enterprise. At least 40% continuity of equity interest by value is a benchmark.
5) Continuity of business enterprise. The acquiring corporation must continue either operating the historic business of the acquired corporation or using a significant portion of the acquired corporation’s historic business assets. Continuing a
significant line of business is sufficient if there was more than one. |
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Term
| PROCEDURE - Return Due Date |
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Definition
| A corporation must file a return (postmarked) no later than the 15th day of the 3rd month after the close of its tax year (March 15 for a calendar-year corporation). An automatic extension of 6 months is provided to a corporation that files Form 7004 and pays its estimated tax liability on or before the initial due date. |
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Term
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Definition
| A corporation that has no taxable income in the current year and has ceased doing business, dissolved, and retained no assets does not exist for federal tax purposes, without regard to state law. A final tax return should be filed; thereafter, no return is required. |
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Term
| PROCEDURE - Liability Payment and Penalties |
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Definition
| Tax liability must be paid when the return is due, disregarding extensions. Penalties are imposed for not filing or paying when and as required. |
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Term
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Definition
| Cases closed after examination will not be reopened to make adjustments unfavorable to the taxpayer except under certain circumstances. Qualifying circumstances include evidence of fraud, malfeasance, collusion, concealment, or misrepresentation of a material fact. |
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