Impact of Stock Dividend on Distributing Corporation

Section 1032 precludes any gain to the distributing corporation upon issuance of its own stock- common or preferred Because of this, a stock dividend, whether it’s taxable or not, is not taxable at the corporate level, meaning that Section 311(b) doesn’t apply. The bottom line is a corporation will not pay stock on a stock…

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Section 305(b)(4): Distributions on Preferred Stock Exception

Section 305(b)(4) is an exception to Section 305(a) that deals with distributions on preferred stock. This is a little bit different because preferred stock in this case really isn’t considered a stock. This exception is essentially saying that any distribution on preferred stock, whether the distribution itself is common or preferred stock will be taxable.…

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Section 305(b)(2)&(3) Disproportionate Distributions Exception to Section 305(a)

Under the disproportionate distributions exception (Section 305(b)(2)), stock that is distributed to one group of shareholders and cash or other property distributed to another group of shareholders won’t be covered under Section 305(a) and will be taxable. The next exception is Section 305(b)(3), which says that if some distributions are common stock, and some shareholder…

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Exceptions to Section 305(a) Tax-Free Treatment: In Lieu of Money

There are five exceptions to Section 305(a) tax free treatment of stock dividend distributions.  The main idea behind these exceptions are that if the distributions enrich some shareholders and while some are not, then it will be taxable. These exceptions are a little easier to understand if you think of preferred stock as property for…

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Introduction to Distribution of Corporate Stock to Shareholders

The related Sections that cover the topic of corporate stock distributions are Sections 305,306,307. For the purpose of Sections 301(dividends),302(redemptions),303(redemptions for a decedent), and 304(sale of stock to a related corporation), “property” does not include: Stock in the company that’s making the distribution, or The rights to acquire stock (Section 313(a)) What this all means…

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Section 302(b)(4): Partial Liquidations of Closely-Held Corporations

Partial Liquidations Under Section 302(b)(4) Section 302(b)(4) provides sale or exchange treatment on a “partial liquidation” for a non-corporate shareholder Section 302(e) defines a partial liquidation Not essentially equivalent to a dividend- this is tested at the corporate level rather than at the individual shareholder level) Distribution is part of a plan that occurs during…

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Section 304(a)(2): Parent-Subsidiary Sales of Stock

As an example, if John owns ABC and DEF, and he transfers some of his ABC stock back to ABC in exchange for $300,000. This is a standard Section 302(b) redemption but it will obviously fail 302(b) in its present state. There are two requirements: ABC must control DEF. John doesn’t need to be in…

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Section 304: Stock Redemptions Through Related Brother-Sister Corporations

How Section 304 Works: The redemption of a small number of shares out of a relatively large number of shares will be treated as a dividend The sale of these same shares to an unrelated party will likely generate capital gain treatment What about when the sale of shares by the shareholder are sold to…

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Section 303: Stock Redemptions to Pay Death Taxes

Section 303 was passed by Congress to minimize the risk that a business would have to be sold in order to pay the decedent’s estate tax. Section 303 provides “sale or exchange” treatment to the estate rather than dividend treatment. At the same time, Section 1014 brings the basis up to fair market value, so…

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Introduction to Redemptions of Stock Under Section 302(b)

A stock redemption is when a “corporation acquires its stock from a shareholder in exchange for property.” To the shareholder, a lot of times this can either look like a sale, or look like an ordinary dividend. The tax rules on this issue are trying to divide the line between these two situations. The retirement…

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