Module 5 Introduction

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Из курса от партнера University of Illinois at Urbana-Champaign

Taxation of Business Entities I: Corporations

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University of Illinois at Urbana-Champaign

Taxation of Business Entities I: Corporations

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Курс 3 из 5 — Specialization U.S. Federal Taxation

This course provides an introduction to the U.S. federal income taxation of corporations and their shareholders. The course focuses on the relevant provisions of Subchapter C of the Internal Revenue Code, as well as related Treasury Regulations and judicial opinions, governing corporate formation, operations, distributions, and liquidation. Practical in-class study problems facilitate self-discovery of technical tax knowledge along with the development of a variety of professional skills and attitudes.

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Module 5: Corporate Non-Liquidating Distributions

In this module, you will learn about corporate non-liquidating distributions. First, earnings and profits (E&P) will be discussed, and you will learn how to calculate E&P. Next, you will analyze the treatment of cash distributions followed by property distributions. You will then cover the treatment of stock distributions. Finally, treatment of constructive dividends and qualified dividends will be explored.

Module 5 Introduction3:26

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Michael P Donohoe, PhD, CPA
Associate Professor of Accountancy and PwC Faculty Fellow
Department of Accountancy, Gies College of Business

The previous two models examined the tax implications of corporate formation.

Specifically, you learned about the non-recognition provisions of code sections

1032 and 351 which apply to corporations and shareholders respectively.

You also learned about various topics relating to corporate operations,

such as capital structure and different types of investor losses.

This module examines another aspect of corporate operations,

distribution of after tax profits.

As corporations operate, they can share

their economic successes with shareholders by making distributions.

I say can, because distributions are not necessarily

required and different firms have different incentives and disincentives.

For instance, a publicly traded corporation is likely to face

pressure to make distributions as profitability increases.

However, growing public firms often prefer to

retain profits to fund further growth and expansion.

Similarly, closely held firms tend to avoid certain distributions,

such as dividends if they trigger double taxation.

Nonetheless, distributions are common,

especially in connection with major changes to

capital structure and they come in different forms.

Therefore, from a tax perspective,

it is necessary to classify distribution as a taxable dividend,

or nontaxable return of capital,

or a gain from the sale of stock.

As you might expect, this is no easy task as the tax rules governing

distributions have been described as complex and sometimes even illogical.

In this model, you'll examine

the corporate and shareholder tax treatment of non-liquidating distributions.

The term non-liquidating implies that the distributions are

not in an effort to wind up the affairs of the corporation.

Instead these operating distributions are commonly treated as dividends for tax purposes.

As you will soon learn however,

not all distributions from the corporation to its shareholders are considered dividends.

The tax treatment of non-liquidating distributions relies on several code sections.

Specifically, Code Section 301 governs the amount and classification to

both corporate and non-corporate shareholders of

distributions of property made by a C corporation with respect to its stock.

Under Section 301 C, distributions that are considered dividends under

Code Section 316 are included in gross income

with non-corporate shareholders taxed at preferential long-term tax rates,

and corporate shareholders paying ordinary rates

after any allowable dividends received deduction.

Distributions that are not considered dividends are first treated as the recovery of

shareholder basis with any excess treated

as a gain from the sale or exchange of the stock.

So, what exactly is a non-liquidating dividend distribution?

Section 316 A defines a dividend as any distribution of

property made by a corporation to its shareholders out of its earnings and profits.

Earnings and profits, however,

is not a performance metric,

but rather a pure tax concept.

Thus in the first lesson,

you will examine the concept of earnings and profits and its computation.

Subsequent lessons will examine the tax implications of cash, property,

stock, and constructive distributions followed by a discussion of qualified dividends.

As usual, each lesson is separated into

concepts and applications using Sunchaser Shakery.

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