SU

1
Problem 177 (a)
20k Inv, 11k Basis
SU Corp.
Zane
Zero Current EP 25 Accumulated EP
8k Stock Basis

• (a) 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).

2
Problem 177 (b)
20k Inv, 11k Basis
SU Corp.
Zane
Zero Current EP Zero Accumulated EP
8k Stock Basis
(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).
LLM Corporate Tax Instructor
Dwight Drake
3
Problem 177 (c)
20k Land, 11k Basis 16k Mortgage
SU Corp.
Zane
Zero Current EP 25k Accumulated EP
8k Stock Basis

• (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).

LLM Corporate Tax Instructor
Dwight Drake
4
Problem 177 (d)
20k land, 30k Basis
SU Corp.
Zane
15k Current EP 25k Accumulated EP
8k Stock Basis

• (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.

LLM Corporate Tax Instructor
Dwight Drake
5
Problem 177 (e)
10k Equip, Zero Basis 2k EP Basis
SU Corp.
Zane
Zero Current EP 25k Accumulated EP
8k Stock Basis

• (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).

LLM Corporate Tax Instructor
Dwight Drake
6
Problem 180
Jan 1 100k note, FMV 5k Feb 1 100k cash
Debt Corp.
Andy
Zero Current EP 100k Accumulated EP
100k Stock Basis

• - Amount distributed is 105k (100k plus
  5k).
• - A has100k income under 301 limited by
  100k EP.
• - A stock basis reduced 5k.
• - D Corp has no gain - parenthetical of
  311(b)(1)(A).
• - D Corp EP reduced to zere 312(a)(2).
• - OID interest income reported ratably
  over time by A, with corresponding interest
  deduction to D Corp.

LLM Corporate Tax Instructor
Dwight Drake
7
Hot Constructive Dividend Scenarios

• 1. Excessive compensation to shareholder-employe
  es
• 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

LLM Corporate Tax Instructor
Dwight Drake
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 193

• 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 193

• 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 193

• 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 193

• I Corp borrowed 15k to buy stock, paid 1200
  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 207
100k Cash Dividend
X Inc.
Strap Corp.
Mucho EP
150k Stock Basis
400k Cash
Boot Inc.
All X Inc. Stock

• 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 not 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.

LLM Corporate Tax Instructor
Dwight Drake