Lesson2 Boutline Revised by 9kk4nW9


									Accounting 6073
Fall, 2011

     Lesson 2B: Dividend Received Deduction, Controlled
                 Groups and Related Issues
I. Dividend Received Deduction and Related Problems
       A. In general--
              1. Dividend received deduction (70, 80, 100%) available
                      a. Section 243—domestic corps.
                      b. Section 244—public utilities
                      c. Section 245—foreign corporations
                      d. All subject to limitations of section 246.

              2. 243(a) has most importance--reduces corporate tax rate on dividends from
                     other corps to 10.5% (35%*.3).

       B. Dividends from Domestic Corps
             1. Generally, 70% deduction on any dividend from a domestic corp.
             2. If shareholder owns at least 20% of stock (by vote and value), rises to 80%
             3. Purpose--mitigate multiple taxation of corporate earnings.

       C. Qualified Dividends of affiliated groups (80% vote and value)
             1. 100% deduction for certain inter-corporate dividends received from
                      members of same affiliated group
             2. This applies whether or not consolidated return is filed
             3. To qualify
                     a. parent must file election to which all members consent
                     b. dividend must be paid from E&P accumulated during time of affiliation

       D. Dividends on public utility preferred stock (Section 244)--more limited deduction
             because get deduction on some dividends paid.

       E. Dividends from certain foreign corps (Section 245)--
              1. Doing business in U.S.: thru complex formula, deduction for dividends
                      received where earnings subject to US tax.
              2. Doing business abroad: deemed paid FTC allows FTC on foreign taxes
                      paid by 10% owned FCs. Covered under FTC code sections.

       F. Dividends paid to foreign corps--70 or 80% deduction is not available--subject to
              w/h tax, unless U.S. business situs.
       G. Definition and amount of dividend:
             1. Dividend: distribution of property from corporation to its shareholder from
                     current or accumulated E&P (IRC 316).
             2. Amount of distribution: fair market value of prop or amount of cash received
             3. To qualify for DRD, dividend must be included in GI of recipient
             4. Non-dividend distributions:
                     a. distributions in excess of E&P
                     b. redemption proceeds that qualify for sale or exchange treatment
                     c. liquidation proceeds (sale or exchange treatment)
                     d. amounts received by shareholder in some other capacity (e.g. employee)

       H. Section 246--Limitation on dividend received deduction
             1. Dividends from certain corps excluded--e.g. taxable under 501
             2. Must limit deductions IAW formula when in NOL position (see p 5-50)
             3. Must hold stock at least 45 days--holding period tolled if taxpayer
                     reduces risk of loss thru hedge.
             4. Deduction reduced by % of leveraged stock--unless
                     a. Taxpayer owns at least 50% of the stock,
                     b. Taxpayer is entitled to 100% DRD, or
                     c. T owns at least 20% of corporation and 5 or fewer own at least 50%

       I. Section 1059: Basis reduction for “extraordinary” dividends
               1. Problem: corporation buys stock for 100, dividend of 40 paid, takes DRD,
                      sells stock for 60.
               2. To combat, IRC 1059 imposes basis reduction
               3. Basis is reduced by non-taxed portion of extraordinary dividend:
                      a. exceeds 5% (preferred) or 10% of stock's basis unless
                      b. held more than 2 years before "announcement date"
               4. This rule N/A where
                      a. consolidated return is filed, or
                      b. stock held for all of dividend payer's existence.
               5. See e.g. p. 5-54.

III. Limitation on Multiple Tax Benefits for Members of Controlled Groups

       A. Introduction--without these rules, could obtain multiple tax benefit of lower rates
               by creating multiple corps (give e.g.)

       B. IRC 1561--component members of controlled group must divide certain benefits, as if
             they were one corporation.

              1. Lower rate brackets
              2. 250K AE tax exemption
              3. $40K AMT exemption
              4. Dollar value limit of various tax credits
              5. Section 179 depreciation allowance
              6. Various provisions re employee benefit plans

(Benefits divided equally unless members agree to alternative apportionment plan).

       C. Controlled Group of Corporations defined--3 categories:
             1. Parent/Subsidiary controlled group--one or more chains connected w/
                     common parent thru 80% vote/value.
             2. Brother/Sister controlled group--two or more corps where 5 or fewer
                     shareholders (individuals, estates, trusts)

                      a. own at least 80% vote and value of each corporation and
                      b. own more than 50% vote and value of each corporation, taking into
                             account the stock ownership of each person only to the extent it is
                             identical or overlapping in each corporation.
                      c. Example—A, an individual owns 50% of the only class of stock of X
                             Co, and 35% of the only class of Y Co. B, an individual owns
                             40% of X Co and 45% of Y Co. X and Y are a brother sister
                             controlled group because:

                             --A and B together own at least 80% of the vote and value of X
                             and Y (together they own 90% of X and 80% of Y) and,

                             --A and B together own more than least 50% of X and Y
                             considering only their identical ownership. A’s identical
                             ownership in X and Y is 35%. B’s identical ownership in those
                             corporations is 40%. Thus, X Co. and Y Co. are a brother-sister
                             controlled group because A’s and B’s identical ownership of those
                             corporations totals more than 50% (75% in this case).

                      d. See also B & E e.g. p. 13-17.

              3. Combined group--three or more corps,
                    a. each of which is a member of a parent sub group or a brother sister
                            group and
                    b. one of which is a common parent corporation.

              4. Attribution rules provide that certain stock may be attributed to others
                       p. 13-19.

       D. A bit of history: Prior to Section 1561, Section 269 said that if control of corporation
       is acquired for principle purpose of tax avoidance, may disallow allowances that would
       be unavailable without corporate form. However, it is easier for IRS to proceed under
       1561, since it doesn't involve inquiry into intent of owners.
E. Consolidated Returns
      1. Affiliated groups may elect to file a consolidated return
      2. Group would then be taxed on its consolidated income
              --intercompany transactions eliminated (including dividends)
      3. The law is contained in lengthy regulations
      4. Matching rules reflect single entity approach--e.g. affiliates must take
               offsetting items (e.g. interest income and interest expense) into account at
              the same time.

To top