Exam 6: Corporations: Redemptions and Liquidations

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 not § 306 stock for Tammy.

In determining whether a distribution qualifies as a § 303 redemption to pay death taxes, the stock attribution rules must be applied.

Mary and Jane, unrelated taxpayers, own Gray Corporation's stock equally. One year before the complete liquidation of Gray, Mary transfers land basis of $200,000, fair market value of $130,000) to Gray Corporation as a contribution to capital. Assume that Mary also contributed other property in the same transaction having a basis of $20,000 and fair market value of $100,000. In liquidation, Gray distributes the land to Jane. At the time of the liquidation, the land is worth $110,000. a. How much loss, if any, may Gray Corporation recognize on the distribution of the land to Jane? b. Assume that the transfer of land to Gray Corporation was made so that the corporation could subdivide the land and build residential housing. However, a subsequent deterioration of the housing market forced Gray Corporation to abandon its plans. What amount of loss may Gray Corporation recognize on the distribution of the land to Jane?

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

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:

Ruby Corporation has announced plans to liquidate. Bronze Corporation owns 85% of Ruby's stock. If Bronze wants to avoid the nontaxable treatment associated with a § 332 liquidatione.g., nonrecognition of loss), it could reduce its stock ownership in Ruby to below 80%.

Hannah, Greta, and Winston own the stock in Redpoll Corporation E & P of $900,000) as follows: Hannah, 600 shares; Greta, 400 shares; and Winston, 1,000 shares. Greta is Hannah's daughter, and Winston is Hannah's brother. Redpoll Corporation redeems 400 of Hannah's shares basis of $55,000) for $240,000. Hannah purchased the stock three years ago as an investment. With respect to the stock redemption, Hannah has:

A redemption will qualify as a not essentially equivalent redemption only if the shareholder's interest in the redeeming corporation has been meaningfully reduced.

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:

In general, if a shareholder's ownership interest is not diminished as a result of a stock redemption, the Code will treat the transaction as a sale or exchange.

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

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:

Brown Corporation purchased 85% of the stock of Green Corporation five years ago for $850,000. In the current year, Brown Corporation liquidates Green Corporation and acquires assets with a basis to Green Corporation of $700,000 fair market value of $1.1 million). Brown Corporation will have a basis in the assets of $850,000, the same as Brown's basis in its Green stock.

Reginald and Roland Reginald's son) each own 50% of the stock of Robin Corporation. Reginald's stock interest is entirely redeemed by Robin. Two years later, Reginald loans Robin $250,000. The loan to Robin Corporation does not constitute a prohibited interest for purposes of the family attribution waiver.

Vireo Corporation redeemed shares from its sole shareholder pursuant to a written agreement between the parties that clearly identified the transaction as a stock redemption not a dividend distribution). Since the agreement is binding under state law, the shareholder will receive sale or exchange treatment with respect to the redemption.

At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding, the corporation distributed $300,000 to redeem 400 shares of its stock. The transaction qualified as a disproportionate redemption for the shareholder. Blackbird's E & P is reduced by $300,000 as a result of the distribution.

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.