Stock Distributions Tx 8120

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Stock DistributionsTx 8120
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Achievement Goals
You should be able to

1. Describe consequences of ______ distributions and
2. Determine the impact of stock _______ on
   shareholders.

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Non-Liquidating Distributions
Property Distribution
Stock Distribution
Stock Redemption
Shareholders
Shareholders
Shareholders
Property
Stock
Stock
Property
Corporation
Corporation
Corporation
Shareholder (distributee) Issues
Corporation (distributor) Issues
1. How much gain or loss do shareholders
recognize? 2. What basis do shareholders take in
stock received? 3. When does the holding period
begin in stock received?
1. How much gain or loss does the corporation
recognize? 2. How is the corporations EP
affected?
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Section 317(a)
(a) Property. For purposes of this part, the
term property means money, securities, and any
other property except that such term does not
include stock in the corporation making the
distribution (or rights to acquire such stock).
Stock includes (1) ______ in distributor and
(2) ______ _______ in distributor
Shareholders
Stock
Corporation
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Historical Perspective

• U.S. Constitution, ____ Amendment, allowed
  Congress to tax income.
• Revenue Act of ____ required taxation of all
  dividends.
• Eisner v. Macomber (S.Ct., 1920) held ______
  stock dividends on ______ stock were not income.
• Revenue Act of ____ said stock dividends were not
  taxable.

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Section 305(a)
Shareholder issues Gain or loss recognized
(a) General rule. Except as provided in this
section, gross income does not include the amount
of any distribution of the stock of a corporation
made by such corporation to its shareholders with
respect to its stock.
Distributions in which ______________ interests
do not change are nontaxable.
Shareholders
(a) Pro rata C.S. dividend on ____ (b) Pro rata
____ dividend on C.S. where no ____ previously
outstanding
Stock
Corporation
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Section 305(b)(1)
Shareholder issues Gain or loss recognized
(b) Exceptions. Subsection (a) shall not apply
to a distribution by a corporation of its stock,
and the distribution shall be treated as a
distribution of property to which section 301
applies--
(1) Distributions in lieu of money. If the
distribution is, at the election of any of the
shareholders (whether exercised before or after
the declaration thereof), payable either--
Shareholders
(A) in its stock, or (B) in property.
Stock or Property
Corporation
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Shareholder issues Gain or loss recognized
Dividend Reinvestment Plans
Shareholders
Cash Option
Shares Worth _____ of Cash Option
Corporation
DRIPs give shareholders a choice between (1)
____ distributions or (2) Additional _______
worth slightly more than cash option.
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Shareholder issues Gain or loss recognized
Choice for Some, But Not Others
Shareholders Owning 800 Shares
Shareholders Owning lt 800 Shares
Corporation
Assume a corporation with only one class of
common stock declares a 4-for-1 stock split and
that shareholders holding at least 800 shares can
receive corporate bonds in lieu of additional
shares.
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Shareholder issues Gain or loss recognized
Almost Identical Classes
Class A Shareholders
Class B Shareholders
Corporation
Assume a corporation has two classes of common
stock possessing identical rights except
dividends to Class A owners must be paid in cash
while dividends to Class B owners must be paid in
additional shares.
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Section 305(b)(2)
Shareholder issues Gain or loss recognized
(b) Exceptions. Subsection (a) shall not apply
to a distribution by a corporation of its stock,
and the distribution shall be treated as a
distribution of property to which section 301
applies--
(2) Disproportionate distributions. If the
distribution (or a series of distributions of
which such distribution is one) has the result
of--
Shareholders
(A) the receipt of property by some shareholders,
and (B) an increase in the proportionate
interests of other shareholders in the assets or
earnings and profits of the corporation.
Property or Interests
Corporation
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Shareholder issues Gain or loss recognized
Increase in Proportionate Interest?
Common Shareholders
Preferred Stock
Corporation
If common shareholders receive a pro rata
distribution of preferred stock, do they increase
their proportionate interests vis-à-vis the
preferred shareholders?
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Shareholder issues Gain or loss recognized
Increase in Proportionate Interest?
Preferred Shareholders
Preferred Stock
Corporation
If preferred shareholders receive a pro rata
distribution of preferred stock, do they increase
their proportionate interests vis-à-vis the
common shareholders?
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Shareholder issues Gain or loss recognized
Increase in Proportionate Interest?
Preferred Shareholders
Common Stock
Corporation
If preferred shareholders receive a pro rata
distribution of common stock, do they increase
their proportionate interests vis-à-vis the
common shareholders?
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Shareholder issues Gain or loss recognized
Increase in Proportionate Interest?
Common Shareholders
Common Stock
Corporation
If common shareholders receive a pro rata
distribution of common stock, do they increase
their proportionate interests vis-à-vis the
preferred shareholders?
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Shareholder issues Gain or loss recognized
Section 305(b)(3)
(b) Exceptions. Subsection (a) shall not apply
to a distribution by a corporation of its stock,
and the distribution shall be treated as a
distribution of property to which section 301
applies--
(3) Distributions of common and preferred stock.
If the distribution (or a series of distributions
of which such distribution is one) has the result
of--
Common Shareholders
(A) the receipt of preferred stock by some common
shareholders, and (B) the receipt of common stock
by other common shareholders.
Common Stock or Preferred Stock
Corporation
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Shareholder issues Gain or loss recognized
Section 305(b)(4)
(b) Exceptions. Subsection (a) shall not apply
to a distribution by a corporation of its stock,
and the distribution shall be treated as a
distribution of property to which section 301
applies--
(4) Distributions on preferred stock. If the
distribution is with respect to preferred stock,
other than an increase in the conversion ratio of
convertible preferred stock made solely to take
account of a stock dividend or stock split with
respect to the stock into which such convertible
stock is convertible.
Preferred Shareholders
Stock
Corporation
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Shareholder issues Gain or loss recognized
Section 305(b)(5)
(b) Exceptions. Subsection (a) shall not apply
to a distribution by a corporation of its stock,
and the distribution shall be treated as a
distribution of property to which section 301
applies--
(5) Distributions of convertible preferred stock.
If the distribution is of convertible preferred
stock, unless it is established to the
satisfaction of the Secretary that such
distribution will not have the result described
in paragraph (2).
Shareholders
Convertible Preferred Stock
Corporation
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Summary Taxable v. Nontaxable

• Based on _________ ______ concept, stock
  dividends are nontaxable, 305(a).
• Exceptions, 305(b)
• Shareholder _____ between property or stock
• ________________ distributions
• ______ shares to some common shareholders,
  __________ shares to others
• Distributions to ___________ shareholders
• Distributions of convertible __________

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Dichotomizing Stock Distributions
Taxable Stock Distribution, 305(_)
Nontaxable Stock Distribution, 305(_)
Shareholders
Treat generally as ________ distribution.
Stock
Corporation
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Section 307(a)
Shareholder issues Nontaxable stock
distribution Basis of shares received
(a) General rule.--If a shareholder in a
corporation receives its stock or rights to
acquire its stock ( new stock) in a
distribution to which section 305(a) applies,
then the basis of such new stock and of the stock
with respect to which it is distributed ( old
stock), respectively, shall, in the
shareholders hands, be determined by allocating
between the old stock and the new stock the
adjusted basis of the old stock.
Shareholders
Stock
Corporation
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Section 1223(5)
Shareholder issues Nontaxable stock
distribution Holding period of shares received
(5) In determining the period for which the
taxpayer has held stock or rights to acquire
stock received on a distribution, if the basis of
such stock or rights is determined under section
307 , there shall be included the period for
which he held the stock in the distributing
corporation before the receipt of such stock or
rights upon such distribution.
Shareholders
Stock
Corporation
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Section 311(a)
Corporate issues Nontaxable stock
distribution Gain or loss recognized
(a) General rule. Except as provided in
subsection (b), no gain or loss shall be
recognized to a corporation on the distribution
(not in complete liquidation) with respect to its
stock of-- (1) its stock (or rights to acquire
its stock), or (2) property.
Shareholders
Stock
Corporation
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Corporate issues Nontaxable stock
distribution EP impact
Section 312(d)(1)(B)
(d) Certain distributions of stock and
securities.--
(1) In general.--The distribution to a
distributee by or on behalf of a corporation of
its stock or securities, of stock or securities
in another corporation, or of property, in a
distribution to which this title applies, shall
not be considered a distribution of the earnings
and profits of any corporation--
Shareholders
(B) if the distribution was not subject to tax in
the hands of such distributee by reason of
section 305(a).
Stock
Corporation
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Nontaxable Stock Distributions305(a)

• Shareholders reallocate basis of prior shares
  between new and old shares based on ________
  ____.
• Holding period of prior shares ______ to new
  shares.
• Distributor recognizes no gain or loss from
  issuing ____ shares.
• _____ is not affected.

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Shareholder issues Taxable stock
distribution Gain or loss recognized
Section 301(b)(1)
(b) Amount distributed.
(1) General rule. For purposes of this section,
the amount of any distribution shall be the
amount of money received, plus the fair market
value of the other property received.
Shareholders
Stock
Corporation
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Shareholder issues Taxable stock
distribution Basis of shares received
Section 301(d)
(d) Basis. The basis of property received in a
distribution to which subsection (a) applies
shall be the fair market value of such property.
Shareholders
Stock
Corporation
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Shareholder issues Taxable stock
distribution Holding period of shares received
Section 1223(2)
For purposes of this subtitle-- (2) In
determining the period for which the taxpayer has
held property however acquired there shall be
included the period for which such property was
held by any other person, if under this chapter
such property has, for the purpose of determining
gain or loss from a sale or exchange, the same
basis in whole or in part in his hands as it
would have in the hands of such other person.
Shareholders
Stock
Corporation
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Corporate issues Taxable stock
distribution Gain or loss recognized
Section 311(a)
(a) General rule. Except as provided in
subsection (b), no gain or loss shall be
recognized to a corporation on the distribution
(not in complete liquidation) with respect to its
stock of-- (1) its stock (or rights to acquire
its stock), or (2) property.
Shareholders
Stock
Corporation
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Corporate issues Taxable stock
distribution EP impact
Section 312(d)(1)(A)
(d) Certain distributions of stock and
securities.--
(1) In general.--The distribution to a
distributee by or on behalf of a corporation of
its stock or securities, of stock or securities
in another corporation, or of property, in a
distribution to which this title applies, shall
not be considered a distribution of the earnings
and profits of any corporation--
Shareholders
(A) if no gain to such distributee from the
receipt of such stock or securities, or property,
was recognized under this title .
Stock
Corporation
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Taxable Stock Distributions305(b)

• Shareholders treat FMV of new shares as
  ____________ distribution.
• Shareholders receive dividend to extent of ____.
• Shareholders take _____ basis in new shares.
• Holding period of new shares starts when
  __________.
• Distributor recognizes no gain or loss from
  issuing ___ shares.
• EP reduced by ____ of new shares, 312(b)(2).

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Summary of Stock Distributions
Nontaxable Taxable
Shareholder Issues
1. Gain or loss recognized None, 305(a) Dividend to extent of EP, 305(b)
2. Basis of stock received Relative FMV allocation, 307(a) FMV, 301(d)
3. Holding period of stock Tacks from old shares, 1223(5) No tacking, 1223(2)

Corporation Issues
1. Gain or loss recognized None, 311(a) None, 311(a)
2. Impact on EP None, 312(d)(1)(B) Reduced by stocks FMV, 312(b)(2)
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Lind et al., pp. 308-309part (a)
This stock distribution is Nontaxable since
proportionate interests do not change,
305(a) Taxable since one or more SHs can choose
between property or stock, 305(b)(1) Taxable
since some SHs receive property while others
increase proportionate interest,
305(b)(2) Taxable since some common SHs receive
C.S. while other common SHs receive P.S.,
305(b)(3) Taxable since preferred SHs receive
distribution (exception for change in conversion
ratio), 305(b)(4) Taxable since convertible
P.S. is distributed (exception if proportionate
interests unlikely to change, 305(b)(5)
Frank (Class A 100 shares)
Fay (Class B 50 shares)
Joyce (Class B 50 shares)
100 shares of nonconvertible P.S.
100 shares of nonconvertible P.S.
200 shares of nonconvertible P.S.
Hill Corporation Class A voting common Class B
voting common Ample EP
Each class A share possesses the same claim on
earnings, claim on assets, and voting rights as
each class B share.
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Lind et al., pp. 308-309part (b)
Is the distribution taxable to Joyce? Fay? Fra
nk?
Frank (Class A 100 shares)
Fay (Class B 50 shares)
Joyce (Class B 50 shares)
5 shares of class B or cash (picks cash)
5 shares of class B or cash (picks stock)
10 shares of class A common stock
Hill Corporation Class A voting common Class B
voting common Ample EP
Each class A share possesses the same claim on
earnings, claim on assets, and voting rights as
each class B share.
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Lind et al., pp. 308-309part (c)
Is the distribution taxable to Joyce? Fay? Fra
nk?
Frank (Class A 100 shares)
Fay (Class B 50 shares)
Joyce (Class B 50 shares)
Pro rata cash distribution
Pro rata cash distribution
Prorata distribution of class A stock
Hill Corporation Class A voting common Class B
voting common Ample EP
Each class A share possesses the same claim on
earnings, claim on assets, and voting rights as
each class B share.
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Lind et al., pp. 308-309part (d)
How does Frank treat this distribution? Nontaxabl
e since proportionate interests do not change,
305(a) Taxable since one or more SHs can choose
between property or stock, 305(b)(1) Taxable
since some SHs receive property while others
increase proportionate interest,
305(b)(2) Taxable since some common SHs receive
C.S. while other common SHs receive P.S.,
305(b)(3) Taxable since preferred SHs receive
distribution (exception for change in conversion
ratio), 305(b)(4) Taxable since convertible
P.S. is distributed (exception if proportionate
interests unlikely to change, 305(b)(5)
Frank (Class A 100 shares)
Fay (Class B 50 shares)
Joyce (Class B 50 shares)
Class B shares
Hill Corporation Class A voting common Class B
nonconvertible 5 preferred Ample EP
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Lind et al., pp. 308-309part (e)
How does Frank treat this distribution? Nontaxabl
e since proportionate interests do not change,
305(a) Taxable since one or more SHs can choose
between property or stock, 305(b)(1) Taxable
since some SHs receive property while others
increase proportionate interest,
305(b)(2) Taxable since some common SHs receive
C.S. while other common SHs receive P.S.,
305(b)(3) Taxable since preferred SHs receive
distribution (exception for change in conversion
ratio), 305(b)(4) Taxable since convertible
P.S. is distributed (exception if proportionate
interests unlikely to change, 305(b)(5)
Frank (Class A 100 shares)
Fay (Class B 50 shares)
Joyce (Class B 50 shares)
Class C nonconvertible preferred with rights
subordinate to class B stock
Hill Corporation Class A voting common Class B
nonconvertible 5 preferred Ample EP
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Lind et al., pp. 308-309part (f)
How does Frank treat this distribution? Nontaxabl
e since proportionate interests do not change,
305(a) Taxable since one or more SHs can choose
between property or stock, 305(b)(1) Taxable
since some SHs receive property while others
increase proportionate interest,
305(b)(2) Taxable since some common SHs receive
C.S. while other common SHs receive P.S.,
305(b)(3) Taxable since preferred SHs receive
distribution (exception for change in conversion
ratio), 305(b)(4) Taxable since convertible
P.S. is distributed (exception if proportionate
interests unlikely to change, 305(b)(5)
Frank (Class A 100 shares)
Debenture Holders
Class A shares
Annual 10 interest payment
Hill Corporation Class A voting common 10
debentures convertible into common Ample EP
Conversion ratio is one common share for 1,000
debenture
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Lind et al., pp. 308-309part (g)
How does Frank treat this distribution? Nontaxabl
e since proportionate interests do not change,
305(a) Taxable since one or more SHs can choose
between property or stock, 305(b)(1) Taxable
since some SHs receive property while others
increase proportionate interest,
305(b)(2) Taxable since some common SHs receive
C.S. while other common SHs receive P.S.,
305(b)(3) Taxable since preferred SHs receive
distribution (exception for change in conversion
ratio), 305(b)(4) Taxable since convertible
P.S. is distributed (exception if proportionate
interests unlikely to change, 305(b)(5)
Frank (Class A 100 shares)
Preferred Shareholders
2-for-1 stock split
Annual 10 cash dividend
Hill Corporation Class A voting
common Convertible 10 preferred Ample EP
Conversion ratio is one common share for four
preferred
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Lind et al., pp. 308-309part (h)
This stock distribution is Nontaxable since
proportionate interests do not change,
305(a) Taxable since one or more SHs can choose
between property or stock, 305(b)(1) Taxable
since some SHs receive property while others
increase proportionate interest,
305(b)(2) Taxable since some common SHs receive
C.S. while other common SHs receive P.S.,
305(b)(3) Taxable since preferred SHs receive
distribution (exception for change in conversion
ratio), 305(b)(4) Taxable since convertible
P.S. is distributed (exception if proportionate
interests unlikely to change, 305(b)(5)
Frank (Class A 100 shares)
Fay (Class B 50 shares)
Joyce (Class B 50 shares)
Prorata distribution of nonconvertible P.S.
Prorata distribution of nonconvertible P.S.
Prorata distribution of class A stock
Hill Corporation Class A voting common Class B
voting common Ample EP
Each class A share possesses the same claim on
earnings, claim on assets, and voting rights as
each class B share.
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Lind et al., pp. 308-309part (i)
This stock distribution is Nontaxable since
proportionate interests do not change,
305(a) Taxable since one or more SHs can choose
between property or stock, 305(b)(1) Taxable
since some SHs receive property while others
increase proportionate interest,
305(b)(2) Taxable since some common SHs receive
C.S. while other common SHs receive P.S.,
305(b)(3) Taxable since preferred SHs receive
distribution (exception for change in conversion
ratio), 305(b)(4) Taxable since convertible
P.S. is distributed (exception if proportionate
interests unlikely to change, 305(b)(5)
Frank (Class A 100 shares)
Fay (Class B 50 shares)
Joyce (Class B 50 shares)
Convertible into 5 class B shares any time within
20 years
Prorata distribution of convertible P.S.
Prorata distribution of convertible P.S.
Prorata distribution of 10 class A shares
Hill Corporation Class A voting common Class B
voting common Ample EP
Each class A share possesses the same claim on
earnings, claim on assets, and voting rights as
each class B share.
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Shareholder issues Nontaxable stock
rights Basis of rights received
Section 307(b)(1)
(b) Exception for certain stock rights.
(1) In general. If--
(A) a corporation distributes rights to acquire
its stock to a shareholder in a distribution to
which section 305(a) applies, and (B) the fair
market value of such rights at the time of the
distribution is less than 15 percent of the fair
market value of the old stock at such time,
then subsection (a) shall not apply and the basis
of such rights shall be zero, unless the taxpayer
elects to determine the basis of the old stock
and of the stock rights under the method of
allocation provided in subsection (a).
Shareholders
Stock Rights
Corporation
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Shareholder issues Nontaxable stock
rights Basis of rights received
Stock Rights Planning
Even when the ___ of stock rights received lt ___
of the old stocks ___, the shareholder expecting
to sell the rights may ____ to allocate some
basis to the rights to minimize capital gain.
Shareholders
Stock Rights
Corporation
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Summary of Stock Right Distributions
Nontaxable Taxable
Shareholder Issues
1. Gain or loss recognized None, 305(a) Dividend to extent of EP, 305(b)
2. Basis of rights received If FMV of rights lt 15 of old stock and no election, zero basis, 307(b) Otherwise, allocation, 307(a) FMV, 301(d)
3. Holding period of rights Tacks from old shares only if basis allocation occurs, 1223(5) No tacking, 1223(2)

Corporation Issues
1. Gain or loss recognized None, 311(a) None, 311(a)
2. Impact on EP None, 312(d)(1)(B) Reduced by rights FMV, 312(b)(2)
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Disposition of Stock Rights
Reg. 1.307-1(a)
If the shareholder
Then
Selling price less _________ basis equals gain or
loss
1. Sells rights
2. Exercises rights
__________ basis adds to cost of new shares
_________ basis reverts to original shares
3. Allows rights to lapse