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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 1

True/False

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At the time of her death, Janice owned (in terms of the value of the stock outstanding) the following stock: 18% of Heron Corporation and 21% of Hawk Corporation. The value of these stocks is included in Janice's gross estate. For purposes of applying the 35% of the value of adjusted gross estate requirement under § 303 (i.e., redemption to pay death taxes), the Heron and Hawk stocks are aggregated.

A) True
B) False

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Question 2

Multiple Choice

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Hazel, Emily, and Frank, unrelated individuals, own all of the stock in Wren Corporation (E & P of $1.2 million) as follows: Hazel, 1,300 shares; Emily, 400 shares; and Frank, 300 shares.Wren redeems 300 of Hazel's shares (basis of $60,000) for $450,000.With respect to the distribution in redemption of the stock:

A) Hazel has a capital gain of $390,000.
B) Hazel has dividend income of $450,000.
C) Hazel has dividend income of $390,000.
D) Hazel has a capital gain of $450,000.
E) None of the above.

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

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B

Question 3

Multiple Choice

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Rust Corporation distributes property to its sole shareholder, Andre.The property has a fair market value of $350,000, an adjusted basis of $205,000, and is subject to a liability of $220,000.Current E & P is $500,000.With respect to the distribution, which of the following statements is correct?

Gander, a calendar year corporation, has a deficit in current E & P of $100,000 and a $290,000 positive balance in accumulated E & P. If Gander determines that a $500,000 distribution to its shareholders is appropriate at some point during the year, what is the maximum amount of the distribution that could potentially be treated as a dividend?

Lupe and Rodrigo, father and son, each own 50% of the stock outstanding of Heron Corporation (E & P of $400,000) . During the current year, Heron redeems all of Lupe's shares for $250,000. The transaction cannot qualify as a complete termination redemption if:

Goldfinch Corporation distributes stock rights to its shareholders. How is the basis of the stock rights received by Goldfinch's shareholders determined?

If stock rights are taxable, the recipient has income to the extent of the fair market value of the rights.

Cash distributions received from a corporation with a positive balance in accumulated E & P at the beginning of the year will be taxed as dividend income.

Timothy owns 100% of Forsythia Corporation's stock.Corporate employees and annual salaries include Timothy ($300,000); Richard, Timothy's son ($80,000); Rita, Timothy's daughter ($100,000); and Sandy ($120,000).The operation of Forsythia Corporation is shared about equally between Timothy and Sandy (an unrelated party).Richard and Rita are full-time college students at a university about 150 miles away.Forsythia Corporation has substantial E & P but has not distributed a dividend for the past five years.Discuss problems related to the salary arrangement for Forsythia Corporation.

In applying the stock attribution rules to a stock redemption, stock owned by a shareholder who owns 65% of a corporation is deemed to be owned in full by the corporation.

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

Canary Corporation has 1,000 shares of stock outstanding.It redeems in a qualifying stock redemption 350 shares for $400,000 at a time when it has paid-in capital of $100,000 and E & P of $1 million.What would be the charge to Canary's E & P as a result of the redemption?

Orange Corporation has a deficit in accumulated E & P of $600,000 and has current E & P of $450,000.On July 1, Orange distributes $500,000 to its sole shareholder, Morris, who has a basis in his stock of $105,000.As a result of the distribution, Morris 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:

Which of the following is not a consequence of the double tax on dividends?

Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.

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

A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.

The gross estate of Raul, decedent who died in 2012, 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?

Five years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 1,000 shares of Blue Corporation in a transaction that qualified under § 351.The assets had a tax basis to her of $100,000 and a fair market value of $270,000 on the date of the transfer.In the current year, Blue Corporation (E & P of $800,000) redeems 250 shares from Eleanor for $220,000 in a transaction that does not qualify for sale or exchange treatment.With respect to the redemption, Eleanor will have a: