Tax effects of many corporate distributions changed by the Tax Reform Act of 1986

Article Abstract:

The Tax Reform Act of 1986 plans to increase corporate taxes by $120 billion during the five years following its enactment, while reducing corporate tax rates. To achieve both objectives, the law will expand corporate tax bases, by eliminating most tax benefits, lengthening depreciation schedules, eliminating many corporate deductions, and applying a minimum corporate tax. The Tax Reform Act's effect on corporate distributions arising from stock transactions and transfers is examined in detail. Dividends received by domestic firms from other domestic firms will continue to generate deductions (although these deductions will be valued at 80 percent of the dividend received, where formerly they were calculable as 85 percent), while dividends received from small business company stocks will provide corporations with deductions equal to the full value of the dividend received. Exceptions to these basic corporate distribution rules are discussed for extraordinary dividends, stock redemptions (arising from corporate repurchases of its own stocks), stock liquidations, and the accumulated earnings tax.

Finance, taxation, & monetary policy, Dividends, Tax deductions, Stock redemption, Stock transfer

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New double tax on liquidations can be avoided by certain corporations that act promptly

Article Abstract:

The Tax Reform Act of 1986 imposes two taxes on corporate liquidations, at the corporate level and at the shareholder level. Under Section 336 of the Act, the corporation must recognize the gain or loss on the sale of any assets, even when the proceeds of the sale are distributed to the shareholders as part of a corporate liquidation. Shareholders must recognize the gain or loss on the cancellation of their stock in exchange for liquidating distributions. Corporations that move quickly enough to take advantage of certain transitional rules and some types of small corporations may be able to qualify for relief from the new gain recognition rules.

Economic aspects, Stockholders, Tax reform, Assets (Accounting), Liquidation, Partition, Partition (Property)

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Sale of partnership interests can produce unexpected tax results without proper planning

Article Abstract:

Section 751 of the Tax Reform Act of 1986 is intended to prevent ordinary income from being converted into capital gains through the transfer of a partnership interest instead of through the sale of the partnership's underlying assets. Section 751 provides two tests to determine the appreciation of inventory items. The fair market value of the items involved must exceed 10 percent of the market value of the partnership property, other than cash, and it must also exceed 120 percent of the adjusted basis of the property to the partnership. The tax planning implications of this new rule are discussed.

Partnership, Partnerships, Capital gains tax

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