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Tax research: Non-liquidating distributions

Analyze how corporations treat non-liquidating distributions and determine the most likely mistake(s) the client could make that would result in an IRS audit. Advise the client on how to avoid the mistake(s) and how you would respond to the IRS inquiry if an audit request is received.

Take a position as to whether the current tax rules related to the payment of dividends are fair. Support your position with examples. Propose an alternative to the current tax rules that would be fairer.

Solution Preview

Corporations treat non-liquidating distributions as current distributions. The recipients are responsible for reporting the distributions on their tax returns, and they're taxed at the ordinary income tax rate unless the distribution is considered a qualified dividend. If it is a qualified dividend, the 2013 tax rate is zero. Before a corporation pays any type of distribution, it must be declared either as a dividend (the most common type of distribution) or other type of distributable income. The board of directors then indicates the rate of the non-liquidating distribution, the recipients, and the planned date for the distribution. The company then transfers all of the necessary information over to the financial statements, including the notes to the financial statements during the ...

Solution Summary

This solution explains how corporations treat non-liquidating distributions. This solution also explains how a client could make a mistake that would result in an audit, and the best practices to avoid a tax audit. This solution also explains whether the current tax rules related to the payment of dividends are fair, and how the rules could be revised (if at all), to make this type of tax treatment fairer.