Exam 6: Corporations Redemptions and Liquidations

When is a redemption to pay death taxes under § 303 most advantageous?

As a result of a redemption, a shareholder's interest (direct and indirect) in the corporation decreased from 80% to 55%. The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

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

Coffee Corporation has 2,000 shares of common stock outstanding. John owns 700 of the shares, John's grandfather owns 100 shares, John's father owns 100 shares, John's ex-wife owns 700 shares, and Redbird Partnership owns 400 shares. John is a 50% partner in Redbird Partnership. How many shares is John deemed to own in Coffee Corporation under the § 318 attribution rules?

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.

Under what circumstances will preferred stock received in a nontaxable stock dividend not generate ordinary income, under § 306, upon its disposition?

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?

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.

Pursuant to a liquidation, Coral Corporation distributes to Lucinda, a shareholder, land (basis of $90,000, fair market value of $200,000). The land is subject to a $75,000 liability. Lucinda will have a basis of $125,000 in the land.

For purposes of the waiver of the family attribution rules in a complete termination redemption, the former shareholder must notify the IRS within 30 days of acquiring a prohibited interest in the corporation during the 10-year period following the redemption.

If a parent corporation makes a § 338 election, the subsidiary corporation must be liquidated.

Betty's adjusted gross estate is $9 million. The death taxes and funeral and administration expenses of her estate total $1.2 million. Included in Betty's gross estate is stock in Heron Corporation, valued at $3.3 million as of the date of her death. Betty had acquired the stock six years ago at a cost of $810,000. If Heron Corporation redeems $1.2 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.

Penguin Corporation purchased bonds (basis of $190,000) of its 100% owned subsidiary, Finch Corporation, at a discount. Pursuant to a § 332 liquidation and in satisfaction of the indebtedness, Finch distributes land worth $200,000 (basis of $160,000) to Penguin. Which of the following statements is correct with respect to the distribution of land?

Hazel, Emily, and Frank, unrelated individuals, own all of the stock in Wren Corporation (E & P of $1.2 million) as follows: Hazel, 1,500 shares; Emily, 300 shares; and Frank, 200 shares. Wren redeems 900 of Hazel's shares (basis of $210,000) for $625,000. With respect to the distribution in redemption of the stock:

Finch Corporation distributes property (basis of $225,000, fair market value of $300,000) to a shareholder in a distribution that is a qualifying stock redemption. The property is subject to a liability of $160,000, which the shareholder assumes. The basis of the property to the shareholder is:

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?

If a parent corporation makes a § 338 election, the subsidiary corporation recognizes gain but not loss on the deemed sale of its assets on the qualified stock purchase date.

Raul's gross estate 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 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?

For purposes of a partial liquidation, the termination of a business test is a subjective test that should be relied upon only after obtaining a favorable ruling from the IRS.

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 andE & P of $1.5 million. What would be the charge to Canary's E & P as a result of the redemption?