Question

1.) Explain the process of stock redemption.

2.) Why do non-corporate shareholders prefer stock redemptions to qualify for sale treatment? (tax implications)

3.) Describe the difference between liquidating and non-liquidating distributions from a partnership.

4.) The primary purpose of taxation is to create revenue for the federal government. What are three secondary purposes?

5.) What is the purpose of Domestic Production Activities Deduction (DPAD)?

Answer 1

1)SOMETIMES SHARES OF STOCK OFFERED BY A COMPANY ARE NOT REGULAR,MARKET DRIVEN ,COMMON SHARE.INSTEAD THEY MAY BE PREFERENCE SHARES,WHICH WILL CONSIDERED FIXED INCOME SECURITIES AND ARE ISSUED WITH A PAR VALUE .WHEN THE PAR VALUE IS PAID BACKTO THE PURCHASER OF THE PREFERENCE SHARE ,THIS IS CONSIDERED A REDEMPTION.AN THE PROCESS OF REDEMPTION IS AS FOLLOW_:

( NOTE-REDEEMABLE PREFRENCE SHARE CAN BE REEDEMED ONLY,EQITY SHARE CAN NOT BE REEDEMED AT ANY COST)

1- IT MUST BE AUTHORIZED BY ARTICLES OF ASSOCIATION OF COMPANY.

2-THE SHARES WIIL BE REEDEEMED ONLY IF THEY ARE FULLY PAID UP.

3-THE SHARES MAY BE REEDEMED OUT OF THE PROFITS OF THE COMPANY WHICH OTHERWISE WOULD BE AVAILABLE FOR DIVIDENDS OR OUT PF PROFITS OF NEW ISSUE OF SHARES MADE FOR THE PURPOSE OF REDEEM SHARES.

4-IF THERE IS PREMIUM PAYABLE ON REDEMPTION IT MUST HAVE PROVIDEDE OUT OF SHARES PREMIUM ACCOUNT BEFORE THE SHARES ARE REEDEMED.

5-WHEN SHARES ARE REEDEMED OUT OF PROFITS A SUM EQUAL TO NOMINAL VALUE OF SHARES REEDEMED IS TO BE TRANSFERRED OUT OF PROFITS TO THE CAPITAL REEMPTION RESERVE.THIS AMOUNT SHOULD BE USED FOR REDEMPTION OF PREFERENCE SHARE CAPITAL.THIS RESERVE CAN BE USED TO ISSUE OF FULLY PAID BONUS SHARES TO THE MEMBER OF THE COMPANY.

2)A NON CORPORATE SHAREHOLDER IS A PERSON OR PARTNERSHIP THAT OWNS SHARES IN A CORPORATION.

TO QUALIFY FOR SALE OR EXCHANGE TREATMENT ,A STOCK REDEMPTION GENERALLY MUST RESULT IN A SUBSTANTIAL REDUCTION IN SHAREHOLDER'S OWNERSHIP INTREST IN THE CORPORATION.IN THE ABSENCE OF THIS REDUCTION IN OWNERSHIP INTREST, THE REDEMPTION PROCESS ARE TAXED AS DIVIDEND INCOME.IN DETERMINING WHETHER A STOCK REDEMPTION HAS SUFFICIENTLY REDUCED A SHAREHOLDERS' INTRST,THE STOCK OWNED BY CERTAIN RELATED PARTIES IS ATTRIBUTED TO THE REDEEMING SHAREHOLDERS.

3)A-A LIQUIDATTING DISTRIBUTION IS A DISTRIBUTION THAT COMPLETELY TERMINATES A PARTNERS INTRST IN THE PARTNERSHIP.JUST LIKE WITH A CURRENT DISTRIBUTION,A PARTNERSHIP MAKING A LIQUIDATING DISTRIBUTION DOES NOT RECOGNIZE ANY GAIN OR LOSS.

B-NON LIQUIDATING EXPENSES RECOGNIZE GAIN ONLY TO THE EXTENT CASH(OR THE LIABILITY ASSUMED) DISTRIBUTED EXCEEDS THE ADJUSTED BASIS.

4)SECONDRY PURPOSES OF TAXATIONS ARE-

A)TO REDUCE INEQUALITIES IN WEALTH AND INCOME BY IMPOSING PROGRESSIVELY HIGHER TAXES.

B)TO PREVENT INFLATION BY INCREASING TAXES OR WARD OFF DEPRESSION BY DECREASING TAXES

C)GOVERNMENT RECEIVES TAXES FROM THE PEOPLE WHICH IS USED TO PERFORM FUNCTIONS OF GOVERNMENT AND OTHER BENEFITS

.

5)PURPOSE AND NATURE OF THE TAX DEDUCTIONS.THE DOMESTIC PRODUCTION ACTIVITIES DEDUCTION IS INTENTED TO PROVIDE TAX RELIEF FOR BUSINESS THAT PRODUCE GOODS IN THE UNITED STATES RATHER THAN PRODUCING IT OVERSEAS.FORM 8903 IS USED TO CLAIM THE DPAD BY SMALL AND LARGE BUSINESS .THIS DEDUCTION IS INTENDED TO PROVIDE TAX INCENTIVE FOR BUSINESS THAT PRODUCE MOST OF THEIR GOODS OR WORK IN THE UNITED STATES RATHER THAN SENDING THAT WORK OVERSEAS.