Water Corporation report Essay Example for Free

Water Corporation report Essay Comparison of Dividends and Redemptions. Bailey is one of four equal unrelated shareholders of Checker Corporation. Bailey has held Checker stock for four years and has a basis in her stock of $40,000. Checker has $280,000 of current and accumulated EP and distributes $100,000 to Bailey. What are the tax consequences to Checker and to Bailey if Bailey is an individual and the distribution is treated as a dividend? The amount of a distribution equals money received plus the FMV of any non money property received reduced by any liabilities assumed or acquired by the shareholder. The distribution is treated as a dividend to the extent of the distributing corporation’s current and accumulated EP. Any additional; excess is  treated as a capital gain. The shareholder’s basis in the property received is its FMV. The shareholder’s holding period for the property begins on the day after the distribution date. When a corporation distributes appreciated property, it must recognize gain as if it sold the property for its FMV immediately before the distribution. For gain recognition purposes, a property’s FMV is deemed to be at least equal to any liability to which the property is subject or that the shareholder assumes in connection with the distribution. A corporation recognizes no loss when it distributes to its shareholders property that has depreciated in value. A corporation’s EP is increased by any EP gain resulting from a distribution of appreciated property. A corporation’s EP is reduced by (a) the amount distributed plus (b) the greater of the FMV or EP adjusted basis of any non money property distributed, minus  © any liabilities to which the property is subject or that the shareholder assumes in connection with the distribution. EP also is reduced by taxes paid or incurred on the corporation’s recognized gain, if any. In Part a, what would be the tax consequences if Bailey were a corporation? The amount of a distribution equals money received plus the FMV of any non money property received reduced by any liabilities assumed or acquired by the shareholder. The distribution is treated as a dividend to the extent of the distributing corporation’s current and accumulated EP. Any distribution amount exceeding EP is treated as a return of capital that reduces the shareholder’s stock basis (but not below zero). Any additional excess is treated as a capital gain. The shareholder’s basis in the property received is its FMV. The shareholder’s holding period for the property begins on the day after the distribution date. What are the tax consequences to Checker and to Bailey (an individual) if Bailey surrenders all her stock in a redemption qualifying for sale treatment? Sale Exception: If the redemption meets specific requirements, the distribution amount received by the shareholder is offset by the adjusted basis of the shares surrendered. The difference generally is treated as a capital gain or loss. No basis adjustment occurs. Gain/Loss Recognition: Under the sale exception, the corporation recognizes gain (but not loss) as though it has sold distributed noncash property for its FMV immediately before redemption. Earnings and Profits Adjustment: For a redemption treated as a sale, EP is reduced  by the portion of current and accumulated attributable to the redeemed stock. Any distribution amount exceeding this portion reduces the corporation’s paid-in capital. In Part c, what would be the tax consequences if Bailey were a corporation? Sale Exception: If the redemption meets specific requirements, the distribution amount received by the shareholder is offset by the adjusted basis of the shares surrendered. This difference is generally treated as a capital gain or loss. No basis adjustment occurs. Which treatment would Bailey prefer if Bailey were an individual? Which treatment would Bailey Corporation prefer? Bailey would prefer to be taxed and treated as an individual. Bailey corporation would prefer to be treated like a corporation. Compare the tax consequences to the shareholder and the distributing corporation of the following three kinds of corporate distributions: ordinary dividends, stock redemptions, and complete liquidations Ordinary Dividends The amount of a distribution equals money received plus the FMV of any non money property received reduced by any liabilities assumed or acquired by the shareholder. The distribution is treated as a dividend to the extent of the distributing corporation’s current and accumulated EP. Any additional; excess is treated as a capital gain. The shareholder’s basis in the property received is its FMV. The shareholder’s holding period for the property begins on the day after the distribution date. When a corporation distributes appreciated property, it must recognize gain as if it sold the property for its FMV immediately before the distribution. For gain recognition purposes, a property’s FMV is deemed to be at least equal to any liability to which the property is subject or that the shareholder assumes in connection with the distribution. A corporation recognizes no loss when it distributes to its shareholders property that has depreciated in value. A corporation’s EP is increased by any EP gain resulting from a distribution of appreciated property. A corporation’s EP is reduced by (a) the amount distributed plus (b) the greater of the FMV or EP adjusted basis of any non money property distributed, minus  © any liabilities to which the property is subject or that the shareholder assumes  in connection with the distribution. EP also is reduced by taxes paid or incurred on the corporation’s recognized gain, if any. Stock Redemption for Shareholders General Rule: The distribution amount received by a shareholder in exchange for his or her stock is treated as a dividend to the extent of the distributing corporation’s EP. The basis of the surrendered stock is added to the basis of the shareholder’s remaining stock. Distributing Corporation Gain/Loss Recognition: Under the general rule, the corporation recognizes gain (but not loss) as though it had sold distributed noncash property for its FMV immediately before the redemption. Earnings and Profits Adjustment: For a redemption treated as a dividend, EP is reduced in the same manner as for regular dividend.