Exam 6: Corporations Redemptions and Liquidations

The stock in Toucan Corporation is held equally by two brothers. Four years ago, the shareholders transfer property (basis of $200,000, fair market value of $220,000) to Toucan Corporation as a contribution to capital. In the current year and pursuant to a complete liquidation of Toucan, the property is distributed proportionately to the brothers. At the time of the distribution, the property had a fair market value of $40,000. What amount of loss will Toucan Corporation recognize on the distribution of the property?

In a redemption of § 306 stock, the redemption proceeds constitute ordinary income (treated as a dividend for purposes of the preferential tax rate on dividend income) to the extent of the corporation's E & P on the date of the redemption.

During the current year, Goldfinch Corporation purchased 100% of the stock of Dove Corporation and made a qualified election under § 338. Which of the following statements is incorrect with respect to the § 338 election?

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?

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

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 no recognized gain or loss.

A shareholder's basis in property acquired in a stock redemption is the property's fair market value as of the date of redemption.

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:

Explain why the antistuffing rules were enacted to limit the deductibility of losses realized by a corporation upon liquidation.

Liquidation expenses incurred by a corporation are generally deductible as § 162 trade or business expenses.

Yolanda owns 60% of the outstanding stock of Amber Corporation. In a qualifying stock redemption, Amber distributes $20,000 to Yolanda in exchange for one-half of her shares (basis of $35,000). As a result of the redemption, Yolanda has a recognized capital loss of $15,000.

The stock of Lavender Corporation is held as follows: 80% by Jade Corporation (basis of $400,000) and 20% by Tiffany (basis of $100,000). Lavender Corporation is liquidated in December of the current year, pursuant to a plan adopted earlier in the year. Pursuant to the liquidation, Lavender Corporation distributed Asset A (basis of $600,000, fair market value of $900,000) to Jade, and Asset B (basis of $250,000, fair market value of $225,000) to Tiffany. No election is made under § 338. With respect to the liquidation of Lavender:

Compare the sale of a corporation's assets with a sale of its stock from the perspective of the seller.

If a parent corporation makes a § 338 election, the subsidiary corporation is treated as a new corporation as of the day following the qualified stock purchase date.

Purple Corporation has two equal shareholders, Joshua and Ellie, who are father and daughter. One year ago, the two shareholders transferred properties to Purple in a § 351 exchange. Joshua transferred land (basis of $600,000, fair market value of $450,000) and securities (basis of $70,000, fair market value of $250,000), while Ellie transferred equipment (basis of $420,000, fair market value of $700,000). In the current year, Purple Corporation adopts a plan of liquidation, sells all of its assets, and distributes the proceeds pro rata to Joshua and Ellie. The only loss realized upon disposition of the properties was with respect to the land that had decreased in value to $310,000 and was sold for this amount. Purple never used the land for any business purpose during the time it was owned by the corporation. What amount of loss can Purple Corporation recognize on the sale of the land?

The built-in loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property's fair market value after its transfer to the corporation.

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

To carry out a qualifying stock redemption, Turaco Corporation (E & P of $800,000) transfers land held for investment purposes to Aida, a shareholder. The land had a basis of $250,000, a fair market value of $400,000, and is subject to a $300,000 liability. Aida has a basis of $70,000 in the shares redeemed. Which of the following is a correct statement regarding the tax consequences of this redemption?