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Level 128

Capital Structure of a Corporation

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Stock in trade means
Banks and Development Financial Institution
such investment is sold, exchanged or worthless
An investor in a corporation generally is unable to recognize any tax advantage from a struggling investment until
expenses and losses incurred in the business from any outside income that may be received
An individual proprietor or a partner who invests in a losing venture is usually entitled to deduct the
deducted from ordinary income
Losses incurred by individuals on section 1224 stock, whether arising on a sale of the stock or on its worthlessness can be
Obligation to repay
are §163
Interest payments by a corporation are/are not currently deductible
Interest payment received by debt holder is/is not currently taxable
are not deductible and are not taxable
Principle payments are/are not deductible and are/are not taxable
are, §1(h)(11)
Interest payments are/are not received at different tax rates
Redemption by corporation if
Debt is redeemed for less than face value
taxpayer status of business bad debt or nonbusiness bad debt
If debt is redeemed for less than face value, outcome depends on
Business bad debt
§166(a)(1) treated as an ordinary loss when debt becomes worthless.
Non Business bad debt
§166(a)(d) for individual tax payers, treated as short term capital loss
Business/Non Business bad debt
Stake of Ownership
are not
Dividend payments are/are not deductible
Since dividend payments are not deductible, corporations typically prefer to _______ debt
redemption, sale or worthless
A disposition of equity can be considered a
capital losses
Capital gains are offset against
Net capital gains are taxed
2, 3
Net capital losses are carried back _ years and forward _ years
Capital Gains
the dollar gains that result when a capital asset is sold for more than it costs.
Net capital losses can offset
ordinary income by $3,000 annually
3, indefinitely
Net capital losses are carried back _ years and forward _______
Netting rules
net everything together in a category, then use short term losses to offset collectibles, than depreciables, than everything else
1 year or less
Qualify as short term capital gain/loss
MORE than 1 year
Qualify as long term capital gain/loss
Capital gain/loss
Sell or exchange of capital asset
Capital gains and losses _______ each other
For Corporations, Capital losses can be carried back _ years and forward _ years
ordinary income up to $3,000/year
For individuals, net capital losses can offset
Long term G/L collectible items
Long term G/L depreciable property
Long term G/L everything else
If stock is §1244, losses are treated as
ordinary up to $50,000 (single tax payer) or $100,000 (jointly)
§1244 Stock Rules
Total amount of money/property received by a corporation at stock issue cannot exceed $1M, individual taxpayer claiming loss must have acquired stock directly from corporation, and first $50,000 or $100,000 of loss is ordinary, excess is capital.
§_______ has rules to reclassify debt as equity
debt as equity
§385 has rules to reclassify _______ as _______
D/E ratio of 1.5:1 (using asset basis, not FMV) anything else in excess can be recast as equity.
Method of raising capital for Debt
Interest payments are deducted by corporation included as ordinary income by receiver
Generally STCL (worthless non-business bad debt)
Method of raising capital for Disposition of Debt
Method of raising capital for Equity
Dividends not deducted but taxed at preferential rates
Capital asset unless §1244 stock
Method of raising capital for Disposition
Method of raising capital for Hybrid Instruments
Look at real relationship between corporation and investor
beyond certain threshold
Method of raising capital for recasting debt as equity