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Exam 6: Corporations: Redemptions and Liquidations

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Question 1

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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 own stock in Parakeet.In applying the § 318 attribution rules:

A) The estate owns 400 shares.
B) Keshia owns 320 shares.
C) Keshia owns 600 shares.
D) The estate owns 460 shares.
E) None of the above.

F) All of the above
G) None of the above

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Question 2

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Vulture Corporation distributes land (basis of $250,000,fair market value of $475,000) to Bonita,a shareholder,to carry out a qualifying stock redemption.The land is distributed subject to a $300,000 liability.Bonita had a basis of $25,000 in the shares redeemed.With respect to the redemption:

A) Vulture Corporation will recognize a gain of $50,000.
B) Vulture Corporation will recognize a gain of $225,000.
C) Bonita will recognize a gain of $450,000.
D) Bonita will have a basis of $175,000 in land.
E) None of the above.

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

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Question 3

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What are the tax consequences of a qualifying stock redemption to the distributing corporation?

Explain the requirements for the termination of a business test for purposes of a partial liquidation.Why is this test generally preferable over the genuine contraction of a corporate business test for qualifying a distribution as a partial liquidation?

Three years ago,Darlene received preferred (§ 306)stock pursuant to a nontaxable stock dividend from Grackle Corporation.In the current year,Darlene gives the Grackle preferred stock to her sister,Nancy.The Grackle preferred stock is § 306 stock with regards to Nancy.

Ethel,Hannah,and Samuel,unrelated individuals,own the stock in Broadbill Corporation (E & P of $700,000) as follows: Ethel,300 shares;Hannah,300 shares;and Samuel,400 shares.Broadbill redeems 200 of Samuel's shares (basis of $175,000) for $250,000.If Samuel's stock is a capital asset and has been held for over three years,Samuel has:

Hannah,Greta,and Winston own the stock in Redpoll Corporation (E & P of $900,000) as follows: Hannah,600 shares;Greta,400 shares;and Winston,1,000 shares.Greta is Hannah's daughter,and Winston is Hannah's brother.Redpoll Corporation redeems 400 of Hannah's shares (basis of $55,000) for $240,000.Hannah purchased the stock three years ago as an investment.With respect to the stock redemption,Hannah has:

For tax purposes,all stock redemptions are treated as dividend distributions.

Scarlet Corporation,the parent corporation,has a basis of $600,000 in the stock of Brown Corporation,a subsidiary in which it owns 90% of all classes of stock.Scarlet purchased the stock in Brown Corporation 10 years ago.In the current year,Scarlet Corporation liquidates Brown Corporation and acquires assets worth $800,000 and with a tax basis to Brown Corporation of $950,000.What basis will Scarlet Corporation have in the assets acquired from Brown Corporation?

Six years ago,Ronald and his mom each owned 50% of the stock of Bronze Corporation.At such time,Bronze redeemed all of Ronald's stock.For the redemption year,Ronald filed the agreement required of the family attribution waiver and reported the transaction as a complete termination redemption (i.e. ,sale or exchange).In the current year,the mom passed away and willed her entire stock interest in Bronze to Ronald.The inheritance of Bronze stock by Ronald is a prohibited interest for purposes of the family attribution waiver.

The Code treats corporate distributions that are a return of a shareholder's investment as sales or exchanges and corporate distributions that are a return from a shareholder's investment as dividends.

Indigo 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?

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:

Sally and her mother are the sole shareholders of Owl Corporation.During the current year,Owl distributes cash in redemption of all of Sally's stock.Sally continues to be employed as controller for Owl after the redemption.The distribution is a complete termination redemption resulting in sale or exchange treatment for Sally.

At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding,the corporation distributed $300,000 to redeem 400 shares of its stock.The transaction qualified as a disproportionate redemption for the shareholder.Blackbird's E & P is reduced by $280,000 as a result of the distribution.

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?

The related-party loss limitation in a complete liquidation can apply to a distribution or sale of property while the built-in loss limitation applies only to distributions of property.

Connie sold 200 shares of § 306 stock (basis of $10,000) in Blackbird Corporation to Larry (an unrelated individual) for $30,000.When the § 306 stock was issued to Connie,the stock had a value of $30,000,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 750 shares of common stock (basis of $65,000) in Blackbird.With respect to the sale of the § 306 stock by Connie:

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

Leon owns 400 shares of the 1,000 outstanding shares of Crane Corporation (E & P of $650,000) .None of the other shareholders of Crane are related to Leon.Leon acquired his Crane shares ten years ago for $60,000.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 $180,000 in redemption of 250 shares of Crane.As a result of this transaction,Leon will recognize: