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Exam 6: Corporations: Redemptions and Liquidations

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Question 61

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A shareholder's holding period of property acquired in a stock redemption begins on the date of the distribution.

A) True
B) False

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Question 62

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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 a recognized loss of $150,000 ($1 million basis in Warbler stock - $850,000 carryover basis in assets).

A) True
B) False

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Question 63

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

The sale of § 306 stock to a third party results in dividend income to the shareholder.

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 § 306 stock for Tammy.

In a not essentially equivalent redemption [§ 302(b)(1)],the meaningful reduction test is an objective safe harbor rule that taxpayers can rely upon for sale or exchange treatment.

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:

Ivory Corporation (E & P of $650,000)has 1,000 shares of common stock outstanding owned by unrelated parties as follows: Veronica,500 shares,and Tommie,500 shares.Veronica and Tommie each paid $125 per share for the Ivory stock 12 years ago.In May of the current year,Ivory distributes securities held as an investment (basis of $140,000,fair market value of $250,000)to Veronica in redemption of 200 of her shares.

Section 332 does not apply to a parent-subsidiary liquidation if the subsidiary corporation is insolvent on the date of the liquidation.

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

The adjusted gross estate of Debra,decedent,is $8 million.Debra's estate will incur death taxes and funeral and administration expenses of $1 million.Debra's gross estate includes stock in Silver Corporation that she had purchased twelve years ago for $600,000 (date of death fair market value of $3 million) .At the time of her death in 2012,Debra owned 80% of the stock in Silver Corporation.Silver Corporation (E & P of $4 million) redeems all of the estate's stock in the corporation for $3 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:

Puffin Corporation's 2,000 shares outstanding are owned as follows: Paul,800 shares;Sandra (Paul's sister),800 shares;and Greta (Paul's granddaughter),400 shares.During the current year,Puffin (E & P of $1 million)redeemed 600 shares of Paul's stock for $100,000.If Paul had acquired the 600 shares five years ago for $30,000,he will have a long-term capital gain of $70,000 from the redemption.