Question

On August 1, 2012, all of the outstanding stock of Bridge Corporation (a calendar year taxpayer) was purchased from an unrelated party for cash by Infrastructure Corporation. On July 1, 2015, Bridge adopted a resolution providing for a plan to completely liquidate. The plan of complete liquidation provided that Bridge would be liquidated upon payment of its indebtedness to a large, publicly held lender, but in any event not later than March, 2018. Bridge’s loan agreement had been entered into prior to the purchase of Bridge’s stock by Infrastructure and prohibited Bridge from liquidating while the loan was outstanding. In February 2018, the loan was paid and the restriction on liquidation was eliminated. By February 28, 2018, Bridge transferred in one distribution all of its assets subject to its liabilities to Infrastructure in complete cancellation of all its stock. Infrastructure is concerned about whether the liquidation of Bridge will run into any problems because of the delay in the actual liquidation.

Answer 1

Dividend distribution is first from current earning and profits and then from accumulated earning and profits. Any dividend distribution in excess of earning and profit is considered as return of capital. Return of capital in excess of capital base will be treated as capital gain.

Earning and profits computed on annual basis at the end of the year.

It is given that that the Clarington Corporation follows calendar year and having two shareholders Adam and Eve. Adam and Eve own 60% and 40% respectively of the Clarington Corporation stock.

In the problem it is given that dividend distribution is in July 1 is $15,000 which is lower than CE&P of $20,000. After doing proportionate apportioned of CE&P ($10,000) in proportion to month elapsed on July 1 with AE&P ($10,000), it is higher than amount paid as dividend and hence the same will be taxed as per applicable tax rate in the hands of Adam and Eve as dividend.

It is given that that the Clarington Corporation follows calendar year and having two shareholders Adam and Eve. Adam and Eve own 60% and 40% respectively of the Clarington Corporation stock.

In the problem it is given that dividend distribution is in July 1 is $25,000 which is higher than CE&P of $20,000. After doing proportionate apportioned of CE&P ($10,000) in proportion to month elapsed on July 1 with AE&P ($10,000), it is lower than amount paid as dividend and hence the same will be taxed as per applicable tax rate in the hands of Adam and Eve as dividend to the extent of $20,000. Amount in Excess of $20,000 i.e. $5,000 will be treated as return of capital and hence not taxable.

It is given that that the Clarington Corporation follows calendar year and having two shareholders Adam and Eve. Adam and Eve own 60% and 40% respectively of the Clarington Corporation stock.

In the problem it is given that dividend distribution is in July 1 is $35,000 which is higher than CE&P of $20,000. After doing proportionate apportioned of CE&P ($10,000) in proportion to month elapsed on July 1 with AE&P ($10,000), it is lower than amount paid as dividend and hence the same will be taxed as per applicable tax rate in the hands of Adam and Eve as dividend to the extent of $20,000. Amount in Excess of $20,000 i.e. $15,000 will be treated as return of capital and hence not taxable.

It is given that that the Clarington Corporation follows calendar year and having two shareholders Adam and Eve. Adam and Eve own 60% and 40% respectively of the Clarington Corporation stock.

In the problem it is given that dividend distribution is in July 1 is $15,000 which is lower than CE&P of $20,000. After doing proportionate apportioned of CE&P ($10,000) in proportion to month elapsed on July 1 with AE&P ($10,000), it is higher than amount paid as dividend and hence the same will be taxed as per applicable tax rate in the hands of Adam and Eve as dividend.

Further dividend payment on December 1 is $15,000 which is higher than remaining accumulated earning & profits ($5,000) and current earning & profits ($10,000/6*5=$8333) hence the same will be taxable as dividend income to the extent of $13,333 in the hands of Adam and Eve and remaining will treated as return of capital and hence not taxable.

It is given that that the Clarington Corporation follows calendar year and having two shareholders Adam and Eve. Adam and Eve own 60% and 40% respectively of the Clarington Corporation stock.

Deficit for first 6 month will be $2,500 in proportionate basis. After setting of CE&P with AE&P adjusted amount will be $7,500. So $7,500 can be paid as dividend and balance $2,500 will be treated as distribution of capital.

It is given that that the Clarington Corporation follows calendar year and having two shareholders Adam and Eve. Adam and Eve own 60% and 40% respectively of the Clarington Corporation stock.

CE&P for first 6 month is $5,000 in proportionate basis. After setting of CE&P with AE&P, adjusted amount will be $ 0. So entire distributed amount should be treated as distribution of capital.

Fair value of dividend is $8,000 where CE&P is $2,000 ($4000/2) on July,1 and AE&P is $3500. So total dividend distribution amount will be $5,500 and $2500 will be treated as return of capital.

Fair value of dividend is $8,000 where CE&P is $2,000 ($4000/2) on July,1 and AE&P is $3000. So total dividend distribution amount will be $5,000 and $3000 will be treated as return of capital.