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Exam 6: Corporations: Redemptions and Liquidations

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Question 51

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Rosa owns all 100 shares of the outstanding stock of Stork Corporation E & P of $500,000) . Rosa had acquired the stock 12 years ago for $100,000. Stork, which has several trades or businesses that it has developed and operated for more than 5 years, sells one of those trades or businesses and, in a transaction qualifying as a partial liquidation [under § 302b) 4) ], redeems 20 shares of Rosa's stock for $300,000. As a result of this transaction, Rosa must recognize:

A) $280,000 dividend income.
B) $280,000 long-term capital gain.
C) $300,000 dividend income.
D) $300,000 long-term capital gain.
E) None of these.

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

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Question 52

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Section 332 can apply to a parent-subsidiary liquidation even if the subsidiary corporation is insolvent on the date of the liquidation.

A) True
B) False

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Question 53

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One advantage of acquiring a corporation via an asset purchase instead of a stock purchase is that an asset purchase avoids the transfer of the acquired corporation's liabilities.

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

The adjusted gross estate of Debra, decedent, is $16 million. Debra's estate will incur death taxes and funeral and administration expenses of $2 million. Debra's gross estate includes stock in Silver Corporation that she had purchased 12 years ago for $1.2 million date of death fair market value of $6 million) . At the time of her death, Debra owned 80% of the stock in Silver Corporation. Silver Corporation E & P of $8 million) redeems all of the estate's stock in the corporation for $6 million. Debra's will names her daughter, Dena, who owns the remaining 20% interest in Silver Corporation, as her sole heir. With respect to this redemption, Debra's estate has the following income:

Tanya is in the 32% tax bracket. She acquired 1,000 shares of stock in Swan Corporation seven years ago for $100 a share. In the current year, Swan Corporation E & P of $1.2 million) redeems all of Tanya's shares for $160,000. What are the income tax consequences to Tanya if: a. The redemption qualifies for sale or exchange treatment and Tanya has no other transactions in the current year involving capital assets? b. The redemption does not qualify for sale or exchange treatment?

Canary Corporation has 5,000 shares of stock outstanding. It redeems in a qualifying stock redemption 1,200 shares for $475,000 at a time when it has paid-in capital of $300,000 and E & P of $1.5 million. What would be the charge to Canary's E & P as a result of the redemption?

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.

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 is related to Leon. Leon acquired his Crane shares 10 years ago for $80,000. Crane has operated several trades or businesses for more than 5 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, Ecru Corporation is liquidated and distributes its only asset, land, to Kena, the sole shareholder. On the date of distribution, the land has a basis of $250,000, a fair market value of $650,000, and is subject to a liability of $500,000. Kena, who takes the land subject to the liability, has a basis of $120,000 in the Ecru stock. With respect to the distribution of the land, which of the following statements is correct?

Betty's adjusted gross estate is $18 million. The death taxes and funeral and administration expenses of her estate total $2.4 million. Included in Betty's gross estate is stock in Heron Corporation valued at $6.6 million as of the date of her death. Betty had acquired the stock six years ago at a cost of $1,620,000. If Heron Corporation redeems $2.4 million of Heron stock from the estate, the transaction will qualify under § 303 as a redemption to pay death taxes and receive sale or exchange treatment.

Legal dissolution under state law is required for a liquidation to be complete for tax purposes.

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

Starling Corporation was organized fifteen years ago to construct office furniture. Eight years ago, Starling began a fast-food business. In the current year, Starling discontinues its fast-food business and sells all of the assets used in that business for $2 million. Further, Starling distributes the entire sales proceeds in a pro rata redemption of 250 shares of stock from each of its two equal shareholders-Morgan, an individual, and Magpie Corporation. Morgan has a basis of $100,000 in her redeemed stock, Magpie Corporation has a basis of $125,000 in its redeemed stock, and both shareholders have held their stock interest in Starling for several years. Starling Corporation has E & P of $4 million and 2,000 shares outstanding at the time of the distribution. What are the tax consequences of the stock redemption to Morgan, to Magpie, and to Starling?

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

Indigo corporation has a basis of $1 million in the stock of Owl Corporation, a subsidiary in which it owns 100% of all classes of stock. Indigo purchased the stock in Owl 10 years ago. In the current year, Indigo liquidates Owl and acquires assets worth $1.2 million. At the time of its liquidation, Owl Corporation had a basis of $800,000 in the assets and E & P of $500,000. Which of the following statements is correct with respect to the liquidation?

Keshia owns 200 shares in Parakeet Corporation. Keshia has a 30% beneficiary interest in her deceased grandmother's estate. The estate owns 400 shares in Parakeet Corporation. None of the other beneficiaries of the estate owns stock in Parakeet. In applying the § 318 attribution rules:

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

Pursuant to a complete liquidation, Oriole Corporation distributes to its shareholders land with a basis of $350,000 and a fair market value of $800,000. The land is subject to a liability of $920,000. What is Oriole's recognized gain or loss on the distribution?

Which of the following is an incorrect statement regarding the tax consequences of a § 306 stock disposition?