Questions on Corporate Taxation

An S corporation has to recognize built-in gain of assets from C corporation years, which is the least of taxable income, unrealized built-in gain minus recognized built-in gain and built-in gains reduced by net operating losses from previous years.

All of LT’s distributions, whether in the form of dividends or stock repurchases will be taxed at the investors personal rate. Buy shares and keeping cash in the firm will depend of the tax rate of the investors relative to that of the firm. Under the former option the money is taxed at the corporate rate and in the latter at personal rate.

* However, if these payments are unreasonable, then distribution is considered a ‘constructive dividend’ and is no longer deductible

1. For the year-end December 31, 2007, financial statements, what amount should M record as a liability?

- Dividends received from Spouse A’s investment into Company E is also included as income since the IRS states that dividends from investments is also taxable.

Suppose that P.V. Ltd. paid a dividend of $10 at the end of year 1 (any portion of

1. As of December 31, 2011, what amount, if any, of sales due should be recognized in eVade’s financial statements?

1. All distributions (excluding reasonable salary) to Paula and Mary will be taxed as dividends to them. And the corporation could not deduct this part of distribution.

What is the reasoning for excluding inter-corporate dividends (drd's)? Inter-corporate dividends are seen differently from other types of dividends, capital gains, and income. These kinds of dividends have been subject to double taxation

Company reduces tax paying by splitting the income through imputing dividends: Hobart Bridge Co Ltd v FCT .

Salaries expense is considered deductible by a business according to Publication 535, if the amount is ordinary, necessary, and reasonable. Ordinary means that the expense occurs regularly and necessary means that the expense facilitates the reaching of desirable business goals. The IRS scrutinizes compensation paid to the owner over employees due to lower salary expenses and masking salaries into a large distribution. Mr. Jones and Mandy’s salary amounts of $180,000 and $70,000 respectively are reasonable, however, outstanding distributions are red herrings for masking compensation not included in owner salaries. If Mr. Jones decides to take a cash withdrawal and take dividends, he needs to pass two requirements: prior year dividends were issued to shareholders and his salary is over the 60% profit threshold. To protect the business from IRS suspicion, Mr. Jones and his daughter need meticulous records regarding salary payments

In practice, dividend policy will be affected by taxes as tax rates for different categories of investors will differ. Also, a firm’s dividend policy is perceived by the financial markets to be a signaling mechanism. A cut back in dividends may signify that the firm perceives tough

It has the option to distribute the cash in the form of dividends. Shareholders were taxed on cash dividends at ordinary income rates whereas gains realized on shares that were repurchased received capital gains treatment.

Because often dividends are perceived as spendable income (some stock holders look at stocks as a source of income as it is easier to get a dividend instead of selling the stocks). Sometimes investment opportunities are low, they reach the limit of their marketplace, so companies decides to distribute cash in the form of dividends. For some companies it is a way of showing that the company is stable financially and can fulfill the commitment of paying out a dividend. Also it is a way for companies to mitigate agency problems when they have excess cash.

Dividends are subjected to higher tax rate compare to capital gain increased due to share buy-back. This discourages shareholders from desire to receive high dividends in place of higher capital gain as share values increase. A comparison is made below between the proposed capital structure and dividend policy.