Lesson 6.5.1 Corporate Tax Effects: Concepts

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Do curso por University of Illinois at Urbana-Champaign

Taxation of Business Entities I: Corporations

11 ratings

University of Illinois at Urbana-Champaign

Taxation of Business Entities I: Corporations

11 ratings

Curso 3 de 5 em Specialization U.S. Federal Taxation

This course provides an introduction to the U.S. federal income taxation of corporations and their shareholders. The course focuses on the relevant provisions of Subchapter C of the Internal Revenue Code, as well as related Treasury Regulations and judicial opinions, governing corporate formation, operations, distributions, and liquidation. Practical in-class study problems facilitate self-discovery of technical tax knowledge along with the development of a variety of professional skills and attitudes.

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Module 6: Corporate Redemptions and Partial Liquidations

In this module, you will explore redemptions and partial liquidations, which is when shareholders sell stock back to the issuing corporation in exchange for cash. You will learn about the five types of qualified redemptions, which are applied after you have considered stock attribution rules. Finally, you will analyze how these redemptions are treated by both the shareholders and the corporation.

Lesson 6.5.1 Corporate Tax Effects: Concepts3:37

Lesson 6.5.2 Corporate Tax Effects: Applications4:38

Conheça os instrutores

Michael P Donohoe, PhD, CPA
Associate Professor of Accountancy and PwC Faculty Fellow
Department of Accountancy, Gies College of Business

[MUSIC]

The prior lessons are primarily focused on the shareholder tax treatment of

redemptions.

In this lesson, you will learn about the corporate tax treatment of redemptions.

Which includes gain or loss recognition, effects on E&P,

and the deductibility of redemption expenses.

After learning the concepts, you will apply them to Sunchaser Shakery.

You previously learned that general utilities doctrine,

which was codified in 1954, allowed a corporation to distribute property

to shareholders without recognizing any gain.

A key reason for its repeal in 1986 however, was evidence that insurance

companies were redeeming large amounts of stock by distributing appreciated

securities while avoiding gain recognition at the corporate level.

Congress retorted by requiring corporate gain recognition

on distributions of appreciated property

in a redemption as if the property were sold at fair market value.

Partial liquidations, however,

continue to qualify for non-recognition at the corporate level.

In other words, there were still some elements of the General Utilities Doctrine

lurking in the code.

As you might expect,

clever tax creators were able to exploit the remaining non-recognition rules.

For example, they would transform a direct sales property by a corporation

into tax redistribution through a series of transactions.

After these schemes came to light Congress tightened the rule.

Specifically, when it comes to redemptions, Section 311B,

removes the non-recognition provisions.

And requires the corporation distributing property in redemption of stock,

including a partial liquidation, to recognize gains.

Losses, however, are not recognized on non-liquidating distributions of property.

Therefore, if a corporation wishes to distribute build in loss property,

it is better to first sell the property at a taxable transaction that allows loss

recognition and distributes the the proceeds to shareholders.

Note that the recognition of gains and non-recognition of loss occurs

regardless of whether the redemption is a qualifying redemption for the shareholder.

The effect of redemption on corporate E&P depends on the shareholder tax effects.

If the redemption is treated as a distribution or

dividend under Section 301,

the corporation adjust its E&P just as it would for non-liquidating distributions.

That is it reduces E&P by the amount of cash and

the principle amount of any obligations.

And by the greater of the adjusted basis or

fair market value of any property distributed.

Further, the corporation recognizes any gains and

correspondingly increases current E&P on the distribution of appreciated property.

And reduces current E&P by any taxes paid on that gain.

If the redeeming shareholder receives sale or exchange treatment under section

302(b), then the effective the redemption on corporate E&P is more complex.

In short, Section 312, and 7 provides that in a qualifying redemption.

The E&P of the distributing corporation is reduced by

an amount which does not exceed the ratable share

of the corporation's accumulated E&P attributable to the stock redeemed.

For purposes of this section,

accumulated E&P includes any current E&P available at the time of the redemption.

Finally, a redeeming corporation cannot deduct any expenditures incurred in

connection with a stock redemption even if ordinary and necessary.

There is an exception for

interest incurred in a debt financed redemption however.

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