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Exam 6: Corporations: Redemptions and Liquidations

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Question 31

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After a plan of complete liquidation has been adopted,Condor Corporation sells its only asset,land (basis of $170,000) ,to Eduardo (an unrelated party) for $400,000.Under the terms of the sale,Condor Corporation receives cash of $100,000 and Eduardo's notes for the balance of $300,000.The notes are payable over the next five years ($60,000 per year) and carry an appropriate interest rate.Immediately after the sale,Condor Corporation distributes the cash and notes to Maria,the sole shareholder of Condor Corporation.Maria has a basis of $80,000 in the Condor stock.The installment notes have a value equal to their face amount.If Maria wishes to defer as much gain as possible on the transaction,which of the following is correct?

A) Maria recognizes a gain of $80,000 in the year of liquidation.
B) Condor Corporation recognizes no gain or loss on the distribution of the installment notes.
C) Maria recognizes a gain of $240,000 in the year of liquidation.
D) Maria recognizes a gain of $320,000 in the year of liquidation.
E) None of the above.

F) A) and D)
G) All of the above

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Question 32

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

A) No loss is recognized on the sale.
B) The shareholder generally recognizes ordinary income equal to the fair market value of the preferred stock on the date of the stock dividend.
C) Any ordinary income recognized by the shareholder qualifies for the 15% (or 0%) maximum tax rate that applies to dividend income.
D) The issuing corporation reduces its E & P by the amount of sales proceeds.
E) None of the above.

F) B) and E)
G) B) and D)

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Question 33

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For purposes of the built-in loss limitation,the 2-year presumptive rule of tax avoidance can be rebutted if there is a clear and substantial relationship between the contributed property and the corporation's business.

A shareholder's basis in property received in a stock redemption is the property's fair market value.

Hazel,Emily,and Frank,unrelated individuals,own all of the stock in Wren Corporation (E & P of $900,000) as follows: Hazel,250 shares;Emily,250 shares;and Frank,1,000 shares.Wren redeems 400 of Frank's shares (basis of $40,000) for $200,000.With respect to the distribution in redemption of the stock:

Betty's adjusted gross estate is $7 million.The death taxes and funeral and administration expenses of her estate total $800,000.Included in Betty's gross estate is stock in Heron Corporation,valued at $2.1 million as of the date of her death in 2009.Betty had acquired the stock six years ago at a cost of $410,000.If Heron Corporation redeems $800,000 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.

Grackle Corporation (E & P of $900,000)distributes cash of $100,000 and land (fair market value of $500,000;basis of $410,000)to a shareholder in a qualifying stock redemption.The land distributed is subject to a mortgage of $550,000.Grackle will recognize a gain of $140,000 as a result of the distribution.

Currently,Brown Corporation (E & P of $800,000) has 1,000 shares of common stock outstanding.Pat owns 300 shares.His wife owns 300 shares,his daughter owns 200 shares,and his father owns 200 shares.Two years ago,Pat transferred $50,000 to Brown Corporation in exchange for 100 newly issued shares of nonvoting preferred stock.In the current year,Brown Corporation redeems Pat's preferred stock for $60,000,its fair market value.With respect to the distribution in redemption of the preferred stock:

Hawk Corporation has 300 shares of stock outstanding: Marina owns 60 shares,Kent owns 90 shares,and Tom owns 75 shares.Blackbird Partnership owns the remaining 75 shares of stock in Hawk Corporation.Marina,Kent,and Tom,all unrelated,are equal partners of Blackbird Partnership.With respect to the stock attribution rules under § 318:

In applying the stock attribution rules to a stock redemption,stock owned by a 50% or more shareholder of a corporation is deemed to be owned in full by the corporation.

For purposes of the related-party loss limitation,"disqualified property" is defined as property that is acquired by the liquidating corporation in a § 351 or contribution to capital transaction during the two-year period ending on the date of the distribution.

Compare the sale of a corporation's assets with a sale of its stock in terms of problems to the seller.

The stock of Tan Corporation (E & P of $800,000)is owned as follows: 85% by Egret Corporation (basis of $470,000),and 15% by Zoe (basis of $45,000).Both shareholders acquired their shares in Tan more than six years ago.In the current year,Tan Corporation liquidates and distributes land (fair market value of $870,000,basis of $950,000)and equipment (fair market value of $405,000,basis of $280,000)to Egret Corporation,and securities (fair market value of $225,000,basis of $250,000)to Zoe.What are the tax consequences of these distributions to Egret,to Tan,and to Zoe?

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

The stock of Cardinal Corporation is held as follows: 90% by Blue Jay Corporation (basis of $500,000) and 10% by Samuel (basis of $70,000) .Cardinal Corporation is liquidated on October 20,2010,pursuant to a plan adopted on January 8,2010.Pursuant to the liquidation,Cardinal Corporation distributed Asset A (basis of $450,000,fair market value of $720,000) to Blue Jay,and Asset B (basis of $45,000,fair market value of $80,000) to Samuel.No election is made under § 338.With respect to the liquidation of Cardinal:

Which of the following statements is correct with respect to a partial liquidation?

In a redemption to pay death taxes,stock in corporations in which the decedent held a 20% or more interest is treated as stock in a single corporation for purposes of determining whether the value of stock owned by the decedent exceeds 35% of the value of the decedent's adjusted gross estate.

Pursuant to a complete liquidation,Woodpecker Corporation distributes the following assets to its unrelated shareholders: land held for six years as an investment (basis of $100,000,fair market value of $300,000) ,inventory (basis of $100,000,fair market value of $140,000) ,and marketable securities held for two years as an investment (basis of $200,000,fair market value of $120,000) .What are the tax results to Woodpecker Corporation as a result of the liquidation?

Fred is the sole shareholder of Puce Corporation,having a basis of $90,000 in 1,000 shares of Puce common stock.Last year,Puce (E & P of $500,000)issued a dividend of 2,000 shares of preferred stock to Fred.On the date of distribution,the fair market values per share of the common and preferred stocks were $160 and $20,respectively.In the current year,Puce (E & P of $720,000)redeems all of Fred's preferred stock for its fair market value of $40,000.

Reginald and Roland (Reginald's son)each own 50% of the stock of Robin Corporation.Reginald's stock interest is entirely redeemed by Robin Corporation.Two years later,Reginald loans Robin Corporation $250,000.The loan to Robin Corporation constitutes a prohibited interest for purposes of the family attribution waiver.