Exam 6: Corporations: Redemptions and Liquidations

The stock of Tan Corporation E & P of $1.5 million) is owned as follows: 90% by Egret Corporation basis of $900,000), and 10% by Zoe basis of $70,000). 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 $1.1 million, basis of $1.3 million) and equipment fair market value of $700,000, basis of $410,000) to Egret Corporation, and securities fair market value of $200,000, basis of $260,000) to Zoe. What are the tax consequences of these distributions to Egret, to Tan, and to Zoe?

The stock in Rhea Corporation is owned by Jennifer 80%) and Lucy 20%), mother and daughter. In a liquidation of the corporation in the current year, Rhea distributes land that it purchased two years ago for $675,000 to Lucy. The property has a fair market value on the date of distribution of $450,000. One year later, Lucy sells the land for $400,000. What loss, if any, will Rhea Corporation recognize with respect to the distribution of land?

For purposes of a partial liquidation, a distribution is not essentially equivalent to a dividend if it results in a genuine contraction of the business of the corporation.

A liquidation can occur for tax purposes even though the corporation has retained some assets to pay remaining debts and preserve legal status.

The sale of § 306 stock generally results in dividend income to the shareholder and a reduction in the corporation's E & P.

Three years ago, Darlene received preferred § 306) stock pursuant to a nontaxable stock dividend from Grackle Corporation. In the current year, Darlene gives the Grackle preferred stock to her sister, Nancy. The Grackle preferred stock is § 306 stock with regard to Nancy.

A subsidiary corporation is liquidated at a time when it is indebted to its parent corporation. The subsidiary corporation distributes property to the parent corporation in satisfaction of the indebtedness. If the liquidation is governed by § 332, neither the subsidiary nor the parent recognizes gain or loss on the transfer of property in satisfaction of indebtedness.

In a redemption of § 306 stock, the redemption proceeds constitute dividend income to the extent of the corporation's E & P on the date of the redemption.

Explain the requirements for the termination of a business test for purposes of a partial liquidation. Why is this test generally preferable over the genuine contraction of a corporate business test for qualifying a distribution as a partial liquidation?

What are the requirements that must be satisfied for a distribution to qualify under § 302b)2) as a disproportionate redemption?

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.

Hubert receives a nontaxable stock dividend of 100 shares of preferred stock fair market value of $200,000) from Owl Corporation, at a time when Owl's E & P is $800,000. As a result of the stock dividend, Hubert properly allocates $30,000 of his common stock basis to the preferred stock. Two years after the stock dividend, Hubert sells the preferred stock to Tomas, an unrelated party, for $250,000. Owl's E & P at the time of the sale is $900,000. With respect to the sale of the preferred stock, Hubert has:

In applying the § 318 stock attribution rules to a stock redemption, a shareholder is treated as owning the stock of her spouse, children, grandchildren, parents, and siblings.

Scarlet Corporation, the parent corporation, has a basis of $600,000 in the stock of Brown Corporation, a subsidiary in which Scarlet 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?

Grackle Corporation E & P of $600,000) distributes cash of $200,000 and land fair market value of $400,000; basis of $250,000) to a shareholder in a qualifying stock redemption. The land distributed is subject to a mortgage of $460,000. Grackle will recognize a gain of $210,000 as a result of the distribution.

Ivory Corporation E & P of $1 million) has 2,000 shares of common stock outstanding owned by unrelated parties as follows: Veronica, 1,000 shares, and Tommie, 1,000 shares. Both Veronica and Tommie paid $150 per share for the Ivory stock 12 years ago. In May of the current year, Ivory distributes land held as an investment basis of $180,000, fair market value of $390,000) to Veronica in redemption of 350 of her shares. a. What are the tax results to Veronica on the redemption of her Ivory stock? b. What are the tax results to Ivory Corporation on the distribution of the land?

Pursuant to a complete liquidation, Lilac Corporation distributes the following assets to its unrelated shareholders: land held for three years as an investment basis of $300,000, fair market value of $600,000), inventory basis of $100,000, fair market value of $80,000), and marketable securities held for four years as an investment basis of $200,000, fair market value of $240,000). What are the tax consequences to Lilac Corporation as a result of the liquidation?

Bristlebird Corporation E & P of $700,000) has 3,000 shares of common stock outstanding. Juan owns 1,500 shares and his wife, Roberta, owns 1,500 shares. Both Juan and Roberta have a basis of $90,000 in their Bristlebird stock. In the current year, Bristlebird Corporation redeems 1,000 shares from Juan for $250,000. With respect to the distribution in redemption of the Bristlebird stock:

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?

One similarity between the tax treatment accorded liquidating and nonliquidating distributions is with respect to a shareholder's basis in property received in such distributions. For each type of distribution, the shareholder's basis is the property's fair market value on the date of distribution.