Exam 19: Corporations: Distributions Not in Complete Liquidation

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.

Maria and Christopher each own 50% of Cockatoo Corporation,a calendar year taxpayer.Distributions from Cockatoo are: $750,000 to Maria on April 1 and $250,000 to Christopher on May 1.Cockatoo's current E & P is $300,000 and its accumulated E & P is $600,000.How much of the accumulated E & P is allocated to Christopher's distribution?

Tern Corporation,a cash basis taxpayer,has taxable income of $500,000 for the current year.Tern elected $25,000 of § 179 expense.It also had a related party loss of $20,000 and a realized (not recognized) gain from an involuntary conversion of $75,000.It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000.Tern's current E & P is:

To determine current E & P,taxable income must be increased for any domestic production activities deduction.

Rust Corporation distributes property to its sole shareholder,Andre.The property has a fair market value of $350,000,an adjusted basis of $205,000,and is subject to a liability of $220,000.Current E & P is $500,000.With respect to the distribution,which of the following statements is correct?

When current E & P has a deficit and accumulated E & P is positive,the two accounts are netted at the date of the distribution.If a positive balance results,the distribution is a dividend to the extent of the balance.

Briefly discuss the rules related to distributions of non-cash property.

Falcon Corporation ended its first year of operations with taxable income of $250,000.At the time of Falcon's formation,it incurred $50,000 of organizational expenses.In calculating its taxable income for the year,Falcon claimed an $8,000 deduction for the organizational expenses.What is Falcon's current E & P?

The adjusted gross estate of Keith,decedent,is $12 million.Included in the gross estate is stock in Gold Corporation (E & P of $1.3 million),a closely held corporation,valued at $4.6 million as of the date of Keith's death.Keith had acquired the stock twelve years ago at a cost of $900,000.Death taxes and funeral and administration expenses for Keith's estate are $2.3 million.Gold Corporation redeems one-half of the stock from Keith's estate in a § 303 redemption to pay death taxes using property with a fair market value of $2.3 million (adjusted basis of $1.9 million).Which of the following is a correct statement regarding the tax consequences of this redemption?

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 does not constitute a prohibited interest for purposes of the family attribution waiver.

When does a redemption qualify as a not essentially equivalent redemption under § 302(b)(1)?

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

Corporate shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.

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:

Renee,the sole shareholder of Indigo Corporation,sold her stock to Chad on July 1 for $180,000.Renee's stock basis at the beginning of the year was $120,000.Indigo made a $60,000 cash distribution to Renee immediately before the sale,while Chad received a $120,000 cash distribution from Indigo on November 1.As of the beginning of the current year,Indigo had $26,000 in accumulated E & P,while current E & P (before distributions) was $90,000.Which of the following statements is correct?

Stephanie is the sole shareholder and president of Hawk Corporation.She feels that she can justify at least a $220,000 bonus this year because of her performance.However,rather than a bonus in the form of a salary,she plans to have Hawk pay her a $220,000 dividend.Because Stephanie's marginal tax rate is 35%,she prefers to receive a dividend taxed at 15%.Her accountant,however,suggests a $310,000 bonus in lieu of the $220,000 dividend since Hawk Corporation is in the 34% tax bracket.Should Stephanie take the $220,000 dividend or the $310,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Hawk and to Stephanie.

In the current year,Carnation Corporation has a § 179 expense of $20,000.As a result,in the current year,taxable income must be increased by $16,000 to determine current E & P.