1. Stock Distributions Tx 8120

2. Achievement Goals 1.Describe consequences of ______ distributions and 2.Determine the impact of stock _______ on shareholders. You should be able to:

3. Non-Liquidating Distributions Shareholders Corporation Property Shareholders Corporation Stock Shareholders Corporation StockProperty Property DistributionStock DistributionStock Redemption 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? Shareholder (distributee) IssuesCorporation (distributor) Issues

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). Shareholders Corporation Stock Stock includes: (1) ______ in distributor and (2) ______ _______ in distributor

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. 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. Shareholders Corporation Stock Shareholder issues Gain or loss recognized Distributions in which ______________ interests do not change are nontaxable. (a)Pro rata C.S. dividend on ____ (b)Pro rata ____ dividend on C.S. where no ____ previously outstanding

7. 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-- Shareholders Corporation Stock or Property (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-- (A) in its stock, or (B) in property. Shareholder issues Gain or loss recognized

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

9. Choice for Some, But Not Others Shareholder issues Gain or loss recognized 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. Shareholders Owning < 800 Shares

10. Almost Identical Classes Shareholder issues Gain or loss recognized Class A 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. Class B Shareholders

11. 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-- Shareholders Corporation Property or Interests (2) Disproportionate distributions. If the distribution (or a series of distributions of which such distribution is one) has the result of-- (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. Shareholder issues Gain or loss recognized

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

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

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

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

16. 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-- Corporation Common Stock or Preferred Stock (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-- (A) the receipt of preferred stock by some common shareholders, and (B) the receipt of common stock by other common shareholders. Shareholder issues Gain or loss recognized Common Shareholders

17. 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-- Corporation Stock (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. Shareholder issues Gain or loss recognized Preferred Shareholders

18. 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-- Shareholders Corporation Convertible Preferred Stock (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). Shareholder issues Gain or loss recognized

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

21. 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 Corporation Stock Shareholder issues Nontaxable stock distribution Basis of shares received

22. 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 Corporation Stock Shareholder issues Nontaxable stock distribution Holding period of shares received

23. Shareholders Corporation Stock 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.

24. Section 312(d)(1)(B) (d) Certain distributions of stock and securities.-- Shareholders Corporation Stock (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-- (B) if the distribution was not subject to tax in the hands of such distributee by reason of section 305(a). Corporate issues Nontaxable stock distribution E&P impact

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. Section 301(b)(1) (b) Amount distributed. Shareholders Corporation (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. Stock Shareholder issues Taxable stock distribution Gain or loss recognized

27. 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 Corporation Stock Shareholder issues Taxable stock distribution Basis of shares received

28. Section 1223(2) Shareholders Corporation 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. Stock Shareholder issues Taxable stock distribution Holding period of shares received

29. Shareholders Corporation Stock 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.

30. Shareholders Corporation Stock 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-- (A) if no gain to such distributee from the receipt of such stock or securities, or property, was recognized under this title …. Corporate issues Taxable stock distribution E&P impact

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 NontaxableTaxable Shareholder Issues 1. Gain or loss recognizedNone, §305(a)Dividend to extent of E&P, §305(b) 2. Basis of stock receivedRelative FMV allocation, §307(a)FMV, §301(d) 3. Holding period of stockTacks from old shares, §1223(5)No tacking, §1223(2) Corporation Issues 1. Gain or loss recognizedNone, §311(a) 2. Impact on E&PNone, §312(d)(1)(B)Reduced by stock’s FMV, §312(b)(2)

33. Frank (Class A: 100 shares) Hill Corporation Class A voting common Class B voting common Ample E&P Lind et al., pp. 308-309 part (a) Fay (Class B: 50 shares) Joyce (Class B: 50 shares) 100 shares of nonconvertible P.S. 200 shares of nonconvertible P.S. 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) Each class A share possesses the same claim on earnings, claim on assets, and voting rights as each class B share.

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

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

36. Frank (Class A: 100 shares) Hill Corporation Class A voting common Class B nonconvertible 5% preferred Ample E&P Fay (Class B: 50 shares) Joyce (Class B: 50 shares) Class B shares 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) Lind et al., pp. 308-309 part (d)

37. Frank (Class A: 100 shares) Hill Corporation Class A voting common Class B nonconvertible 5% preferred Ample E&P Fay (Class B: 50 shares) Joyce (Class B: 50 shares) Class C nonconvertible preferred with rights subordinate to class B stock 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) Lind et al., pp. 308-309 part (e)

38. Frank (Class A: 100 shares) Hill Corporation Class A voting common 10% debentures convertible into common Ample E&P Debenture Holders Class A shares 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) Conversion ratio is one common share for $1,000 debenture Annual 10% interest payment Lind et al., pp. 308-309 part (f)

39. Frank (Class A: 100 shares) Hill Corporation Class A voting common Convertible 10% preferred Ample E&P Preferred Shareholders 2-for-1 stock split 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) Conversion ratio is one common share for four preferred Annual 10% cash dividend Lind et al., pp. 308-309 part (g)

40. Frank (Class A: 100 shares) Hill Corporation Class A voting common Class B voting common Ample E&P Fay (Class B: 50 shares) Joyce (Class B: 50 shares) Prorata distribution of nonconvertible P.S. 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) Each class A share possesses the same claim on earnings, claim on assets, and voting rights as each class B share. Prorata distribution of class A stock Lind et al., pp. 308-309 part (h)

41. Frank (Class A: 100 shares) Hill Corporation Class A voting common Class B voting common Ample E&P Fay (Class B: 50 shares) Joyce (Class B: 50 shares) Prorata distribution of convertible P.S. 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) Each class A share possesses the same claim on earnings, claim on assets, and voting rights as each class B share. Prorata distribution of 10 class A shares Convertible into 5 class B shares any time within 20 years Lind et al., pp. 308-309 part (i)

42. Shareholders Corporation Stock Rights 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).

43. Stock Rights: Planning Shareholders Corporation Stock Rights Shareholder issues Nontaxable stock rights Basis of rights received 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.

44. NontaxableTaxable Shareholder Issues 1. Gain or loss recognizedNone, §305(a)Dividend to extent of E&P, §305(b) 2. Basis of rights receivedIf FMV of rights < 15% of old stock and no election, zero basis, §307(b) Otherwise, allocation, §307(a) FMV, §301(d) 3. Holding period of rightsTacks from old shares only if basis allocation occurs, §1223(5) No tacking, §1223(2) Corporation Issues 1. Gain or loss recognizedNone, §311(a) 2. Impact on E&PNone, §312(d)(1)(B)Reduced by rights’ FMV, §312(b)(2) Summary of Stock Right Distributions

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