Corporate Tax ConsequencesĪ corporation will not recognize any gain or loss on a distribution of cash to its shareholders. As a result, shares held by these family members and entities are considered to be owned by the shareholder for purposes of determining whether the distribution qualifies as a redemption. Similarly, shares held by corporations, trusts, and partnerships are deemed to be owned by their shareholders beneficiaries, and partners, and vice versa. These attribution rules provide that shares owned by a shareholder’s parents, children, and grandchildren (but not siblings) are considered to be owned by the shareholder. To prevent gamesmanship among related parties, Congress has added another layer of rules that must be analyzed to determine if a distribution is a redemption. It requires (a) that the distribution is not essentially equivalent to a dividend (when viewed from the corporation’s perspective) and (b) that the distribution is “pursuant to a plan and within the taxable year in which the plan is adopted or within the succeeding taxable year.” Partial Liquidations – This test views the distribution from the corporation’s perspective.Substantially Disproportionate Distribution – If the shareholder’s voting interest is reduced by more than 20 percent and the interest that the shareholder retains after the redemption is not a controlling interest, the distribution is treated as a stock redemption.Complete Termination of Interest – If the redemption is “in complete redemption of all of the stock owned by the shareholder,” the distribution is treated as a stock redemption.Redemptions Not Equivalent to Dividends – A distribution is treated as a stock redemption “if the redemption is not essentially equivalent to a dividend.” Although this murky language has been somewhat clarified by rulings and case law, it is not clear enough to rely upon.
#Irc 311 code
The Internal Revenue Code uses four tests to make this distinction: A redemption usually results in capital gain treatment, which can be taxed at preferential rates.Ī distribution qualifies as a stock redemption only if it significantly reduces the interest of the shareholder in the corporation.This loss, which is usually a capital loss, can be deducted against capital gains. If the shareholder’s stock has depreciated, the shareholder can recognize a loss at the time of the redemption.A redemption allows the shareholder to offset his basis in a way that is not available with ordinary distributions, which only allow a basis offset if the corporation has no accumulated earnings and profits.On the other hand, individual shareholders often prefer that the distribution be treated as a redemption, for three reasons: The distinction can be important when the long-term capital gains rates (which apply to redemptions) are higher than the tax rates on dividends.Ĭorporate shareholders may prefer that the distribution be treated as a dividend, allowing the corporation to take advantage of the special dividends-received deduction under Code § 243 (which allows the dividends to only be taxed once at the corporate level). Instead of being treated as dividends, redemptions are treated as a sale or exchange of the stock by the shareholder. Special rules apply to distributions to a shareholder in exchange for the shareholder’s stock (redemptions). Special rules also apply at the corporate level. Important Note: If a shareholder assumes a liability or takes property subject to a liability, the amount of the distribution is reduced by the amount of the liability.
0 kommentar(er)
