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Exam 6: Corporations: Redemptions and Liquidations

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Question 1

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Gains and losses are recognized by the liquidating corporation on distributions to a minority shareholder in a § 332 liquidation.

A) True
B) False

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Question 2

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What are the tax consequences of a § 332 liquidation to the parent corporation, subsidiary corporation, and minority shareholder?

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A parent corporation recognizes no gain ...

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Question 3

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Raul's gross estate includes 1,500 shares of stock of Orange Corporation basis to Raul of $1.2 million, fair market value on date of death of $8.2 million). The estate will incur $4.4 million of death taxes and funeral and administration expenses, and the adjusted gross estate is $22 million. Denise, Raul's daughter and sole heir of his estate, owns the remaining 500 shares of Orange Corporation's shares outstanding. In the current year, Orange E&P of $10 million) redeems all of the estate's 1,500 shares for $8.2 million. What are the tax consequences of the redemption to Raul's estate?

Veronica and Tracy, unrelated individuals, own all the stock in Beige Corporation as equal shareholders. Each has a basis of $20,000 in her 20 shares. Beige Corporation has accumulated E & P of $900,000. Veronica wishes to retire in the current year and wants to sell her stock for $500,000, the fair market value. Tracy would like to purchase Veronica's shares and, thus, become the sole shareholder in Beige Corporation. However, because Tracy is short of funds, Beige Corporation redeems all of Veronica's shares for $500,000. Which of the following is a correct statement regarding the tax consequences of this redemption?

Connie sold 400 shares of § 306 stock basis of $20,000) in Blackbird Corporation to Larry an unrelated individual) for $50,000. When the § 306 stock was issued to Connie, the stock had a value of $50,000, and Blackbird had E & P of $500,000. At the time the § 306 stock is sold, Blackbird's E & P is $550,000. At the time of the sale, Connie owned 900 shares of common stock basis of $210,000) in Blackbird. With respect to the sale of the § 306 stock by Connie:

In comparing a qualifying stock redemption with a complete liquidation, which of the following statements is incorrect?

Seven years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer. In the current year, Blue Corporation E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that qualifies for sale or exchange treatment. With respect to the redemption, Eleanor will have a:

Skylark Corporation owned 100% of the outstanding stock of Quail Corporation having purchased the stock six years ago for $200,000. Pursuant to a plan of liquidation adopted by Quail Corporation earlier in the current year, Quail distributed all its property to its shareholder. Quail Corporation had never been insolvent and had E & P of $700,000 on the date of liquidation. Pursuant to the liquidation, Quail distributes property worth $650,000 basis $340,000) to Skylark Corporation. How much gain must the parties recognize on the transfer of this property to Skylark?

Julian, Berta, and Maria own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation E & P of $750,000) . Berta is Julian's sister, and Maria is Julian's aunt. Caramel Corporation redeems all of Julian's stock for $420,000. Julian paid $200 a share for the stock five years ago. Julian continued to serve on Caramel's board of directors after the redemption. With respect to the redemption:

Yolanda owns 60% of the outstanding stock of Amber Corporation. In a qualifying stock redemption, Amber distributes $20,000 to Yolanda in exchange for one-half of her shares basis of $35,000). As a result of the redemption, Yolanda has a recognized capital loss of $15,000.

Finch Corporation distributes property basis of $225,000, fair market value of $300,000) to a shareholder in a distribution that is a qualifying stock redemption. The property is subject to a liability of $160,000, which the shareholder assumes. The basis of the property to the shareholder is:

Last year, Crow Corporation acquired land in a transaction that qualified under § 351. The land had a basis of $400,000 to the contributing shareholder and a fair market value of $310,000. Assume that the shareholder also transferred equipment basis of $100,000, fair market value of $200,000) in the same § 351 exchange. In the current year, Crow Corporation adopted a plan of liquidation and distributed the land to Ali, a shareholder who owns 20% of the stock in Crow Corporation. The land's fair market value was $230,000 on the date of the distribution to Ali. Crow Corporation acquired the land to use as security for a loan it had hoped to obtain from a local bank. In negotiating with the bank for a loan, the bank required the additional capital investment by Crow as a condition of its making a loan to Crow Corporation. How much loss can Crow Corporation recognize on the distribution of the land?

Which of the following statements is correct with respect to a partial liquidation?

In applying the § 318 stock attribution rules to a stock redemption, the stock of a partnership is deemed to be owned proportionately by its partners.

Sparrow Corporation purchased 90% of the stock of Warbler Corporation eight years ago for $1 million. In the current year, Sparrow liquidates Warbler and acquires assets with a basis to Warbler of $850,000 fair market value of $1.2 million). Sparrow will have a basis in the assets of $850,000 Warbler's basis in the assets), and no recognized gain or loss.

As of January 1 of the current year, Grouse Corporation has E & P of $600,000. Fumiko owns 320 shares of Grouse's common stock basis of $45,000). On that date, Grouse Corporation declares and distributes a nontaxable preferred stock dividend of which Fumiko receives 100 shares. Immediately after the stock dividend, the fair market value of one share of Grouse common stock is $500, and the fair market value of one share of Grouse preferred stock is $200. Two months later, Fumiko sells the 100 shares of preferred stock to an unrelated individual for $20,000. b. What is the effect on Grouse Corporation's E & P as a result of the sale of the preferred stock?

Do noncorporate and corporate shareholders typically have the same preference for the tax treatment of a stock redemption? Explain.

Rodolfo makes a gift of § 306 stock basis of $75,000, fair market value of $100,000) in Kiwi Corporation to his daughter, Josie. When the stock was issued to Rodolfo, his share of Kiwi Corporation's E & P was $80,000. When its E & P is $200,000, Kiwi Corporation redeems all of Josie's stock for $100,000. With respect to the stock redemption:

Corporate shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.

Compare the sale of a corporation's assets with a sale of its stock from the perspective of the seller.