Broadbill corporation a calendar year c corporation

LO.1 Explain the role that earnings and profits play in determining the tax treatment of distributions.

LO.2 Compute a corporation’s earnings and profits (E & P).

LO.3 Determine taxable dividends paid during the year by correctly allocating current and accumulated E & P to corporate distributions.

LO.4 Describe the tax treatment of dividends for individual shareholders.

LO.5 Evaluate the tax impact of property dividends by computing the shareholder’s dividend income, basis in the property received, and the effect on the distributing corporation’s E & P and taxable income.

LO.6 Recognize situations when constructive dividends exist and compute the tax resulting from such dividends.

LO.7 Compute the tax arising from receipt of stock dividends and stock rights and the shareholder’s basis in the stock and stock rights received.

LO.8 Identify various stock redemptions that qualify for sale or exchange treatment.

LO.9 Determine the tax impact of stock redemptions on the distributing corporation.

LO.10 Identify planning opportunities available to minimize the tax impact in corporate distributions, constructive dividends, and stock redemptions.

CHA P T E R OU T L I N E

19-1 Corporate Distributions—Overview, 19-2

19-2 Earnings and Profits (E & P), 19-3 19-2a Computation of E & P, 19-3 19-2b Summary of E & P Adjustments, 19-6 19-2c Current versus Accumulated E & P, 19-6 19-2d Allocating E & P to Distributions, 19-6

19-3 Dividends, 19-10 19-3a Rationale for Reduced Tax Rates on

Dividends, 19-10 19-3b Qualified Dividends, 19-11 19-3c Property Dividends, 19-12 19-3d Constructive Dividends, 19-15 19-3e Stock Dividends and Stock Rights, 19-18

19-4 Stock Redemptions, 19-19 19-4a Overview, 19-19 19-4b Historical Background, 19-22 19-4c Stock Attribution Rules, 19-22

19-4d Not Essentially Equivalent Redemptions, 19-23

19-4e Disproportionate Redemptions, 19-24 19-4f Complete Termination Redemptions, 19-25 19-4g Redemptions to Pay Death Taxes, 19-26

19-5 Effect on the Corporation Redeeming Its Stock, 19-28 19-5a Recognition of Gain or Loss, 19-28 19-5b Effect on Earnings and Profits, 19-28 19-5c Redemption Expenditures, 19-28

19-6 Other Corporate Distributions, 19-29

19-7 Tax Planning, 19-29 19-7a Corporate Distributions, 19-29 19-7b Planning for Qualified Dividends, 19-30 19-7c Constructive Dividends, 19-31 19-7d Stock Redemptions, 19-32

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T H E B I G P I C T U R E Tax Solutions for the Real World

TAXING CORPORATE DISTRIBUTIONS

Lime Corporation, an ice cream manufacturer, has had a very profitable year. To share its profits with its two equal shareholders, Orange Corporation and Gustavo, it distributes cash of $200,000 to Orange and real estate worth $300,000 (adjusted basis of $20,000) to Gustavo. The real estate is subject to a mortgage of $100,000, which Gustavo assumes. The distribution is made on December 31, Lime’s year-end.

Lime Corporation has had both good and bad years in the past. More often than not, however, it has lost money. Despite this year’s banner profits, the GAAP-based balance sheet for Lime indicates a year-end deficit in retained earnings. Consequently, the distribution of cash and land is treated as a liquidating dis- tribution for financial reporting purposes, resulting in a reduction of Lime’s paid-in capital account.

The tax consequences of the distributions to Lime Corporation and its shareholders depend on a variety of factors that are not directly related to the financial reporting treatment. Identify these factors and explain the tax effects of the distributions to both Lime Corporation and its two shareholders.

Read the chapter and formulate your response.