Questions and Comments, Popkin text pp. 74-75

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ACCY 272 Session 09 Chapter 6 (A,B,C) STOCK
DIVIDENDS AND 306 STOCK Text (Lind 6e), pp.
298-326 Problems, pp. 308-309, 325-326 Cases, pp.
309-313Chamberlain, 318-325Fireoved by
Hugh Pforsich
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Chapter 6 (A,B,C) 298-326 Table of Contents

• A. Introduction 298-300
• B. Taxation of Stock Dividends Under 305
  300-309
• Excerpt from Senate Finance Committee Report on
  TRA 1969 303-307
• Note 307-308
• Problems 308-309
• C. 306 Stock 309-326
• 1. The Preferred Stock Bailout 309-314
• Case Chamberlin v. Commissioner 309-313
• Note 313-314
• 2. The Operation of 306 314-326
• a. 306 Stock Defined 314-316
• b. Dispositions of 306 Stock 316-317
• c. Dispositions Exempt from 306 Stock 317-326
• Case Fireoved v. United States 318-325
• Problems 325-326

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A. Introduction 298-300
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B. Taxation of Stock Dividends Under 305
300-309
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B. Taxation of Stock Dividends Under 305
300-309Excerpt from Senate Finance Committee
Report on TRA 1969 303-307
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B. Taxation of Stock Dividends Under 305
300-309Excerpt from Senate Finance Committee
Report on TRA 1969 303-307Note 307-308
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B. Taxation of Stock Dividends Under 305
300-309Problems 308-309

• 1. Hill Corporation is organized with two
  classes of voting common stock Class A and Class
  B. Shares in each class of stock have an equal
  right to Hill's assets and earnings and profits.
  Frank owns 100 shares of Class A stock, and Fay
  and Joyce each own 50 shares of Class B stock.
• Assuming that Hill Corporation has ample
  earnings and profits, determine whether the
  following distributions are taxable under 301 or
  excludable under 305(a)
• (a) A pro rata distribution of nonconvertible
  preferred stock to both
• classes of shareholders.
• (b) A pro rata distribution of Class A stock on
  Class A and Class B on Class B. The Class B
  shareholders also are given the option to take
  cash in lieu of additional Class B shares. Joyce
  exercises this option.
• (c) A pro rata distribution of Class A stock on
  Class A and a cash distribution on Class B.
• (d) Assume that Class B is a class ""Of
  nonconvertible preferred stock which pays regular
  cash dividends and Hill distributes Class B stock
  to the Class A shareholder.
• Same as (d), above, except that Hill distributes
  a class of nonconvertible preferred stock which
  has rights to assets and earnings and profits
  subordinate to those of the existing Class B
  stock (i.e., "junior" nonconvertible preferred
  stock) to the Class A shareholder.

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B. Taxation of Stock Dividends Under 305
300-309Problems 308-309 - continued

• Assume that Hill has only one class of common
  stock outstanding and also has issued a series of
  10 percent debentures convertible into common
  stock at the rate of one share of common stock
  for each 1,000 debenture. Hill makes an annual
  interest payment to the debenture holders and one
  month later distributes a "common on common"
  stock dividend to the common shareholders without
  adjusting the conversion ratio on the debentures.
• Same as (f), above, except that the debentures
  are convertible preferred stock. The corporation
  declares a one-far-one split on the common stock
  (i.e., each shareholder receives one new share of
  common stock for each old share) and the
  conversion ratio of the preferred is doubled.
• Assume again that Class A and Class B are both
  classes of voting common stock. Hill makes a pro
  rata distribution of Class A on Class A and a
  distribution of newly issued shares of
  nonconvertible preferred stock on Class B.
• Same as (h), above, except that the preferred
  stock which is distributed is convertible into
  Class B Stock over 20 years at Class Bs market
  price on the day of the distribution.
• 2. Z Corporation has one class of common stock
  outstanding, held by unrelated individuals A (500
  shares), B (300 shares ) and C (200 shares).
  Will 305(c) create any tax problems if Z agrees
  to redeem annually 50 shares of stock at the
  election of each shareholder, and A makes such an
  election for two consecutive years?

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C. 306 Stock 309-326
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C. 306 Stock 309-3261. The Preferred Stock
Bailout 309-314
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C. 306 Stock 309-3261. The Preferred Stock
Bailout 309-314Case Chamberlin v.
Commissioner 309-313
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C. 306 Stock 309-3261. The Preferred Stock
Bailout 309-314Case Chamberlin v.
Commissioner 309-313Note 313-314
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C. 306 Stock 309-3262. The Operation of 306
314-326
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C. 306 Stock 309-3262. The Operation of 306
314-326a. 306 Stock Defined 314-316
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C. 306 Stock 309-3262. The Operation of 306
314-326b. Dispositions of 306 Stock 316-317
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C. 306 Stock 309-3262. The Operation of 306
314-326c. Dispositions Exempt from 306 Stock
317-326
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C. 306 Stock 309-3262. The Operation of 306
314-326c. Dispositions Exempt from 306 Stock
317-326Case Fireoved v. United States
318-325
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C. 306 Stock 309-3262. The Operation of 306
314-326c. Dispositions Exempt from 306 Stock
317-326Problems 325-326

• 1. In year one, Argonaut Corporation distributed
  nonconvertible nonvoting preferred stock worth
  1,000 to each of its two unrelated equal common
  shareholders, Jason and Vera. The Argonaut common
  stock owned by each of the shareholders had a
  basis of 2,000 prior to the distribution and a
  value of 3,000 immediately after the
  distribution. At the time of the distribution,
  Argonaut had 2,000 of earnings and profits. In
  year three, Argonaut had 3,000 of earnings and
  profits.
• (a) What are the tax consequences to Jason, Vera
  and Argonaut of the distribution of preferred
  stock in year one?
• (b) What results to Vera and Argonaut if Vera
  sells her preferred stock to Carl, an unrelated
  party, for 1,000 in year three?
• (c) Same as (b), above, except that Vera sells
  her preferred stock to Carl for 1,750?
• (d) Same as (b), above, except that Argonaut had
  no earnings and profits at the time of the
  distribution of the preferred stock?
• (e) What results if Jason gives his preferred
  stock to his grandson, Claude, and Claude later
  sells the stock for 1,000? What if Jason dies
  and bequeaths his preferred stock to Claude?
• (f) What results to Jason and Argonaut if in year
  three the corporation redeems half of Jasons
  common stock for 5,000 and all of his preferred
  stock for 1,500?
• (g) Same as (f), above, except the corporate
  bylaws require unanimous shareholder agreement
  for corporate action, and the bylaws may be
  amended only with the concurrence of more than 75
  percent of the shareholders.
• (h) Same as (f), above, except that Argonaut has
  no accumulated or current earnings and profits in
  year three.

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C. 306 Stock 309-3262. The Operation of 306
314-326c. Dispositions Exempt from 306 Stock
317-326Problems 325-326

• Zapco Corporation has 100 shares of common stock
  outstanding all of which are owned by Sam Shifty.
  Zapco has an ample supply of current and
  accumulated earnings and profits.
• (a) If Sam forms Holding Co. by transferring 50
  Zapco shares in exchange for 100 shares of
  Holding common stock and 100 shares of Holding
  preferred stock, will any of the Holding shares
  be Section 306 stock?
• (b) What result if Zapco were owned equally (50
  shares each) by Sam Shifty and Selma Zap, who is
  unrelated to Sam, and the two shareholders form
  Holding Co. by transferring all their Zapco stock
  with Sam taking back 100 shares of Holding Co.
  common stock and Selma taking back 50 shares of
  Holding Co. preferred stock and 50 shares of
  Holding Co. common stock?

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