ACCY 272
Session 09
Chapter 6 (A,B,C)
STOCK DIVIDENDS AND §306 STOCK
Text (Lind [6e]), pp. 298-326
Problems, pp. 308-309, 325-326
Cases, pp. 309-313[Chamberlain], 318-325[Fireoved]
by
Hugh Pforsich
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Chapter 6 (A,B,C) [298-326] – Table of Contents
A. Introduction [298-300]
B. Taxation of Stock Dividends Under §305 [300-309]
• Excerpt from Senate Finance Committee Report on TRA 1969 [303-307]
• Note [307-308]
• Problems [308-309]
C. §306 Stock [309-326]
1. The Preferred Stock Bailout [309-314]
• Case: Chamberlin v. Commissioner [309-313]
• Note [313-314]
2. The Operation of §306 [314-326]
a. §306 Stock Defined [314-316]
b. Dispositions of §306 Stock [316-317]
c. Dispositions Exempt from §306 Stock [317-326]
• Case: Fireoved v. United States [318-325]
• Problems [325-326]
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A. Introduction [298-300]
3
B. Taxation of Stock Dividends Under §305 [300-309]
4
B. Taxation of Stock Dividends Under §305 [300-309]
Excerpt from Senate Finance Committee Report on TRA 1969 [303-307]
5
B. Taxation of Stock Dividends Under §305 [300-309]
Excerpt from Senate Finance Committee Report on TRA 1969 [303-307]
Note [307-308]
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B. Taxation of Stock Dividends Under §305 [300-309]
Problems [308-309]
1. Hill Corporation is organized with two classes of voting common stock: Class A and Class B. Shares in each
class of stock have an equal right to Hill's assets and earnings and profits. Frank owns 100 shares of Class A
stock, and Fay and Joyce each own 50 shares of Class B stock.
Assuming that Hill Corporation has ample earnings and profits, determine whether the following distributions
are taxable under §301 or excludable under §305(a):
(a) A pro rata distribution of nonconvertible preferred stock to both
classes of shareholders.
(b) A pro rata distribution of Class A stock on Class A and Class B on Class B. The Class B shareholders also are
given the option to take cash in lieu of additional Class B shares. Joyce exercises this option.
(c) A pro rata distribution of Class A stock on Class A and a cash distribution on Class B.
(d) Assume that Class B is a class ""Of nonconvertible preferred stock which pays regular cash dividends and Hill
distributes Class B stock to the Class A shareholder.
(e) Same as (d), above, except that Hill distributes a class of nonconvertible preferred stock which has rights to
assets and earnings and profits subordinate to those of the existing Class B stock (i.e., "junior" nonconvertible
preferred stock) to the Class A shareholder.
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B. Taxation of Stock Dividends Under §305 [300-309]
Problems [308-309] - continued
(f) Assume that Hill has only one class of common stock outstanding and also has issued a series of 10 percent
debentures convertible into common stock at the rate of one share of common stock for each $1,000 debenture.
Hill makes an annual interest payment to the debenture holders and one month later distributes a "common on
common" stock dividend to the common shareholders without adjusting the conversion ratio on the
debentures.
(g) Same as (f), above, except that the debentures are convertible preferred stock. The corporation declares a onefar-one split on the common stock (i.e., each shareholder receives one new share of common stock for each old
share) and the conversion ratio of the preferred is doubled.
(h) Assume again that Class A and Class B are both classes of voting common stock. Hill makes a pro rata
distribution of Class A on Class A and a distribution of newly issued shares of nonconvertible preferred stock
on Class B.
(i) Same as (h), above, except that the preferred stock which is distributed is convertible into Class B Stock over
20 years at Class B’s market price on the day of the distribution.
2. Z Corporation has one class of common stock outstanding, held by unrelated individuals A (500 shares), B (300
shares ) and C (200 shares). Will §305(c) create any tax problems if Z agrees to redeem annually 50 shares of
stock at the election of each shareholder, and A makes such an election for two consecutive years?
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C. §306 Stock [309-326]
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C. §306 Stock [309-326]
1. The Preferred Stock Bailout [309-314]
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C. §306 Stock [309-326]
1. The Preferred Stock Bailout [309-314]
Case: Chamberlin v. Commissioner [309-313]
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C. §306 Stock [309-326]
1. The Preferred Stock Bailout [309-314]
Case: Chamberlin v. Commissioner [309-313]
Note [313-314]
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C. §306 Stock [309-326]
2. The Operation of §306 [314-326]
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C. §306 Stock [309-326]
2. The Operation of §306 [314-326]
a. §306 Stock Defined [314-316]
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C. §306 Stock [309-326]
2. The Operation of §306 [314-326]
b. Dispositions of §306 Stock [316-317]
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C. §306 Stock [309-326]
2. The Operation of §306 [314-326]
c. Dispositions Exempt from §306 Stock [317-326]
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C. §306 Stock [309-326]
2. The Operation of §306 [314-326]
c. Dispositions Exempt from §306 Stock [317-326]
Case: Fireoved v. United States [318-325]
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C. §306 Stock [309-326]
2. The Operation of §306 [314-326]
c. Dispositions Exempt from §306 Stock [317-326]
Problems [325-326]
1. In year one, Argonaut Corporation distributed nonconvertible nonvoting preferred stock worth $1,000 to each of
its two unrelated equal common shareholders, Jason and Vera. The Argonaut common stock owned by each of
the shareholders had a basis of $2,000 prior to the distribution and a value of $3,000 immediately after the
distribution. At the time of the distribution, Argonaut had $2,000 of earnings and profits. In year three, Argonaut
had $3,000 of earnings and profits.
(a) What are the tax consequences to Jason, Vera and Argonaut of the distribution of preferred stock in year one?
(b) What results to Vera and Argonaut if Vera sells her preferred stock to Carl, an unrelated party, for $1,000 in year
three?
(c) Same as (b), above, except that Vera sells her preferred stock to Carl for $1,750?
(d) Same as (b), above, except that Argonaut had no earnings and profits at the time of the distribution of the
preferred stock?
(e) What results if Jason gives his preferred stock to his grandson, Claude, and Claude later sells the stock for
$1,000? What if Jason dies and bequeaths his preferred stock to Claude?
(f) What results to Jason and Argonaut if in year three the corporation redeems half of Jason’s common stock for
$5,000 and all of his preferred stock for $1,500?
(g) Same as (f), above, except the corporate bylaws require unanimous shareholder agreement for corporate action,
and the bylaws may be amended only with the concurrence of more than 75 percent of the shareholders.
(h) Same as (f), above, except that Argonaut has no accumulated or current earnings and profits in year three.
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C. §306 Stock [309-326]
2. The Operation of §306 [314-326]
c. Dispositions Exempt from §306 Stock [317-326]
Problems [325-326]
2. Zapco Corporation has 100 shares of common stock outstanding all of which are owned by Sam Shifty.
Zapco has an ample supply of current and accumulated earnings and profits.
(a) If Sam forms Holding Co. by transferring 50 Zapco shares in exchange for 100 shares of Holding common
stock and 100 shares of Holding preferred stock, will any of the Holding shares be Section 306 stock?
(b) What result if Zapco were owned equally (50 shares each) by Sam Shifty and Selma Zap, who is unrelated
to Sam, and the two shareholders form Holding Co. by transferring all their Zapco stock with Sam taking
back 100 shares of Holding Co. common stock and Selma taking back 50 shares of Holding Co. preferred
stock and 50 shares of Holding Co. common stock?
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