Problem 172 c

1
Problem 172 (c) (d) Clarification
Issue What is As basis in stock on sale of ½
to B on 7/1? Two Possibilities Determine at end
of year or at time of sale. If end of year
determination (c) Basis would be (10k 3k
return of capital on 10/1) / 2 3.5k. Gain on
sale would be 15k less 3.5k 11.5k. Basis in
As remaining shares 3.5k. (d) Basis would
be (10k 2.5 return on 4/1 5k return 10/1) /
2 1.25k. Gain on sale would be 13.75k. Basis
in As remaining shares would be 1.25k. If time
of sale determination (c) Basis would be 10k
/ 2 5k. Gain on sale 10k. Basis in remaining
share would be 5k less 3k 2k. (d) Basis
would be (10k 2.5k return on 4/1) / 2 3.75k.
Gain on sale would be 11.25k (15k less 3.75k).
Basis in As remaining shares would be 3.75
before 10/1 5k distribution, which would take
basis to zero and trigger 1.25 gain to A. Which
approach correct? ??, but most think end of year.
2
Problem 177

• Basic Facts Z owns all common stock of C Corp,
  basis of 8k 25k accumlated EP, no current EP.
• C distributes to Z inventory FMV 20k, basis
  11k.
• - C Corp has gain of 9k (20k-11k) per
  311(b)(1) and current EP goes to 9k.
• - Z has 20k dividend 9k from current
  EP 11k from accumulated EP
• - Z basis in inventory 20k.
• - C Corp accumulated EP to next year 14k
  (25k-11k)
• (b) Same as (a) but no accumulated EP.
• - C Corp has gain of 9k (20k-11k) per
  311(b)(1) and current EP goes to 9k.
• - Z has 9k dividend 9k from current EP
  8k return of capital 3k LTCG
• - Z basis in inventory 20k.
• - S Corp accumulated EP to next year is
  0. Property distribution reduces EP to extent
  thereof per 312(a).

3
Problem 177
Basic Facts Z owns all common stock of C Corp,
basis of 8k 25k accumulated EP, no current
EP. (c) C distributes to Z land FMV 20k,
basis 11k, debt 16k. - S Corp has gain
of 9k 1231 gain (20k-11k) per 311(b)(1) and
current EP goes to 9k. - Z has 4k
dividend (20k less 16k) Plenty of accumulated
EP - Z basis in land 20k. - C
Corp accumulated EP to next year is 30k (25k
plus 9k gain, less 4k distribution)
4
Problem 177
Basic Facts Z owns all common stock of C Corp,
basis of 8k 25k accumulated EP, no current
EP. (d) C has 15k current EP, distributes to
Z land FMV 20k, basis 30k. - S Corp
has 10k loss (30k-20k), but cant recognize per
311(a) - Z has 20k dividend Plenty of
accumulated EP - Z basis in land 20k.
- C Corp accumulated EP to next year is 10k
(25k 15k gain, less 30k basis in land). Note
If sold and then distributed cash, C Corp
recognizes 10k loss. Z still has 20k dividend.
C Corps EP carryover still 10k (40k less 10k
loss, less 20k distribution). Only difference is
10k recognized loss.
5
Problem 177
Basic Facts Z owns all common stock of C Corp,
basis of 8k 25k accumulated EP, no current
EP. (e) C distributes to Z equipment FMV
10k, basis 0 for tax 2k for EP - C
Corp has gain of 10k ordinary gain (10k-0k).
- Z has 10k dividend Plenty of accumulated
EP - Z basis in equipment 10k. -
S Corp accumulated EP to next year is 23k (25k
8k E P produced by distribution, less 10k
distribution). 312(b).
6
Problem 179
Basic Facts A owns all common stock of D Corp,
basis of 100k 1005k accumulated EP, no current
EP. On 1/1, D Corp distributes 100k note,
payable in 30 yrs to A, no interest. Issue price
for OID purposes 5k. - A has 5k income
under 301 FMV of note. - D Corp has no
gain - parenthetical of 311(b)(1)(A). - D
Corp EP reduced only by 5k 312(a)(2). -
OID interest income reported ratably over time by
A, with corresponding interest deduction to D
Corp.
7
Hot Constructive Dividend Scenarios
1. Excessive compensation to
shareholder-employees 2. Corporation payment of
personal shareholder expenses 3. Equity
disguised as debt the interest deduction and
return of capital issue 4. Excessive
shareholder rental 5. Phony family employment
6. Personal use of corporate assets 7. Bargain
sales or rentals of corporate property 8.
Brother Sister Corp 482 Trap
8
Trap Four Section 482 Rev. Rule 69-630
Bargain sale
C Corp A
C Corp B
Imputed Income
Imputed Dividend
Imputed Contribution

Common owners

9
243 Deduction Protectors
1. 246 Stock not held long enough 2.
249A - Debt financed stock ownership 3.
1059 - Extraordinary dividends 2 yr rule and
consolidated return rule 4. The Waterman
Bootstrap Acquisition
10
Problem 192

• June 1 P Corp stock trades at 15 declares
  dividend 1 per share. Record date June 8.
  Payment date June 12.
• June 3 I Corp buys 1000 shares for 15k,
  collects 1000 dividend on June 12.
• June 15 I Corp sells stock for 14k
• Tax consequences to I Corp? Desire would be 243
  shelter of 70 of 1k dividend and 1k STCL. But
  flunk excess 45 holding period of 246(c). So, no
  243 deduction. All 1k dividend taxable.
• Sale date Dec 1. 246(c) not apply more than
  45 days satisfied. 243 deduction of 70 allowed.

11
Problem 192

• June 1 P Corp stock trades at 15 declares
  dividend 1 per share. Record date June 8.
  Payment date June 12.
• June 3 I Corp buys 1000 shares for 15k,
  collects 1000 dividend on June 10
• June 15 I Corp sells stock for 14k
• Sale still on Dec 1, but second dividend of 1
  paid on August 15? Per 1059(c)(3)(A), dividends
  with ex-dates within 85 days treated as one
  dividend for 10 excessive dividend to basis
  rule. Here, 2k dividend over 10 of 15k basis.
  Effect under 1059(a) is that basis reduced by
  non-taxable portion - 1400. Hence, stock basis
  reduced to 13,600 (15k less 1400). Note, 243
  deduction still allowed, but creates basis
  reduction. When stock sold for 14k, have 400
  gain, not 1000 STCL.

12
Problem 192

• June 1 P Corp stock trades at 15 declares
  dividend 1 per share. Record date June 8.
  Payment date June 12
• June 3 I Corp buys 1000 shares for 15k,
  collects 1000 dividend on June 10
• June 15 I Corp sells stock for 14k
• I Corp receives total 3k dividends, but holds 25
  months before sale. 1059(a) still applies. Stock
  must have been held 2 years before dividend
  announcement date. Holding period after not
  relevant. Hence, 243 deduction (70 - 2100)
  would reduce basis to 12.9k.

13
Problem 192

• I Corp borrowed 15k to buy stock, paid 1500
  interest and received 1000 dividend? What
  result? No 243 dividend deduction per 246(a).
  Average Indebtedness Percentage is 100, so
  entire deduction lost.
• What if debt 7.5k? Then Average Indebtedness
  Percentage 50 under 246A. Half of 243
  deduction disallowed. Deduction reduced to 35
  or net 350.

14
Problem 206
Basic Facts C Corp hold X Corp stock more than
2 yrs, not part of consolidated group. Basis in
stock 150k. - X Corp pays 100k dividend to
C Corp. Plenty of EP. - B buys X Corp
stock from S for 400k. - Goal 100k
dividend sheltered 70 by 243 capital gain on
sale reduced 100k. Will it work? Its the
Waterman, TSN, Litton Industries issue. Note, if
held stock for less than 2 yrs or consolidated
return, than basis in stock reduced by tax-free
dividend per 1059 and plan fails. Here, 1059 no
apply. Risky if cant show business purpose
(TSN) or unrelated acts (Litton). Was dividend
cash unwanted by buyer? Step Transaction/Sham
doctrines may kill under Waterman rationale.