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Exam 6: Corporations: Redemptions and Liquidations

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Question 51

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Magenta Corporation acquired land in a § 351 exchange one year ago. The land had a basis of $320,000 and a fair market value of $350,000 on the date of the transfer. Magenta Corporation has two shareholders, Mark (70%) and Megan (30%) , who are brother and sister. Magenta Corporation adopts a plan of liquidation in the current year. On this date, the land has decreased in value to $250,000. Magenta Corporation sells the land for $250,000 and distributes the proceeds pro rata to Mark and Megan. What amount of loss may Magenta Corporation recognize on the sale of the land?

A) $0
B) $21,000
C) $30,000
D) $70,000
E) None of the above

F) A) and C)
G) B) and E)

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Question 52

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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:

A) Dividend income of $340,000.
B) Dividend income of $420,000.
C) Long-term capital gain of $340,000.
D) Long-term capital gain of $420,000.
E) None of the above.

F) A) and B)
G) B) and E)

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Question 53

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Raul's gross estate includes 1,500 shares of stock of Orange Corporation (basis to Raul of $600,000, fair market value on date of death of $4.1 million). The estate will incur $2.2 million of death taxes and funeral and administration expenses, and the adjusted gross estate is $9 million. Denise, Raul's daughter and sole heir of his estate, owns the remaining 500 shares of Orange Corporation's (2,000) shares outstanding. In the current year, Orange (E & P of $5 million) redeems all of the estate's 1,500 shares for $4.1 million. What are the tax consequences of the redemption to Raul's estate?

If a liquidation qualifies under § 332, any minority shareholder will recognize gain or loss equal to the difference between the fair market value of assets received and the basis of the shareholder's stock.

The stock in Rhea Corporation is owned by Jennifer (80%) and Lucy (20%) , mother and daughter. In a liquidation of the corporation in the current year, Rhea distributes land that it purchased two years ago for $675,000 to Lucy. The property has a fair market value on the date of distribution of $450,000. One year later, Lucy sells the land for $400,000. What loss, if any, will Rhea Corporation recognize with respect to the distribution of land?

Explain the stock attribution rules that apply in the case of stock redemptions.

When does a redemption qualify as a not essentially equivalent redemption under § 302(b)(1)?

Which of the following is a correct statement regarding a redemption to pay death taxes under § 303?

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. a. Assuming Fumiko is in the 33% tax bracket, what are his income tax consequences resulting from the sale of the preferred stock? b. What is the effect on Grouse Corporation's E & P as a result of the sale of the preferred stock?

Vireo Corporation redeemed shares from its sole shareholder pursuant to a written agreement between the parties that clearly identified the transaction as a stock redemption (and not a dividend distribution). Since the agreement is binding under state law, the shareholder will receive sale or exchange treatment with respect to the redemption.

Tammy forms White Corporation in a transaction qualifying under § 351. In that transaction, Tammy transferred cash and equipment in exchange for White Corporation common (1,000 shares) and preferred (200 shares) stock. The preferred stock is not § 306 stock for Tammy.

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

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:

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.

What are the requirements that must be satisfied for a distribution to qualify under § 302(b)(2) as a disproportionate redemption?

A redemption will qualify as a not essentially equivalent redemption only if the shareholder's interest in the redeeming corporation has been meaningfully reduced.

Which of the following is an incorrect statement regarding the application of the § 318 stock attribution rules?

Leon owns 750 shares of the 2,000 outstanding shares of Crane Corporation (E & P of $900,000) . None of the other shareholders of Crane are related to Leon. Leon acquired his Crane shares ten years ago for $80,000. Crane has operated several trades or businesses for more than five years. In the current year, Crane sells the assets of one of those trades or businesses and distributes the proceeds from the asset sale to the shareholders in a pro rata stock redemption. In this transaction, Leon receives $250,000 in redemption of 300 shares of Crane. As a result of this transaction, Leon will recognize:

During the current year, Goldfinch Corporation purchased 100% of the stock of Dove Corporation and made a qualified election under § 338. Which of the following statements is incorrect with respect to the § 338 election?

Coffee Corporation has 2,000 shares of common stock outstanding. John owns 700 of the shares, John's grandfather owns 100 shares, John's father owns 100 shares, John's ex­wife owns 700 shares, and Redbird Partnership owns 400 shares. John is a 50% partner in Redbird Partnership. How many shares is John deemed to own in Coffee Corporation under the § 318 attribution rules?