Exam 6: Corporations: Redemptions and Liquidations

Meadowlark Corporation has 1,000 shares of stock outstanding.Harvey owns 400 shares; Gabriella (Harvey's cousin)owns 400 shares; and Black Partnership owns 200 shares.Harvey is a 50% partner of Black Partnership.In applying the § 318 attribution rules:

Three sisters,Carol,Lori,and Nina,own the stock in White Corporation equally.The three sisters owned,as tenants in common,a tract of land (basis of $350,000,fair market value of $460,000)that they transferred to White Corporation four years ago as a contribution to capital.In the current year,White Corporation adopts a plan of liquidation and distributes the land,now worth $300,000,equally to Carol,Lori,and Nina as tenants in common.What amount of loss may White Corporation recognize on the distribution of the land?

Swan Corporation incurred $15,000 of accounting and legal fees in the redemption of stock from its shareholders.Swan can deduct the redemption expenditures as trade or business expenses under § 162.

On June 5,2007,Blue Corporation purchased 10% of the Gold Corporation stock outstanding.Blue Corporation purchased an additional 40% of the stock in Gold on May 5,2008,and an additional 30% on July 17,2008.On November 4,2008,Blue Corporation purchased the remaining 20% of Gold Corporation stock outstanding. a.For purposes of the § 338 election, on what date does a qualified stock purchase occur? b.What is the due date for making the § 338 election?

Hummingbird Corporation (E & P of $800,000)distributes land (fair market value of $250,000; basis of $300,000)to an estate in a redemption to pay death taxes under § 303.Hummingbird Corporation will recognize a loss of $50,000 as a result of the distribution.

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

A partial liquidation can result in sale or exchange treatment to a shareholder even if it results in a pro rata stock redemption.

Five years ago,Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 1,000 shares of Blue Corporation in a transaction that qualified under § 351.The assets had a tax basis to her of $400,000 and a fair market value of $550,000 on the date of the transfer.In the current year,Blue Corporation (E & P of $1 million)redeems 100 shares from Eleanor for $290,000 in a transaction that does not qualify for sale or exchange treatment.With respect to the redemption,Eleanor will have a:

A redemption of § 306 stock generates dividend income to the shareholder and reduces the corporation's E & P.

In determining whether the meaningful reduction test has been met (for purposes of a not essentially equivalent redemption),the most significant factor considered is a reduction in the shareholder's voting control.

Cardinal Corporation has a basis of $800,000 in the stock of Finch Corporation,a subsidiary in which it owns 90% of all classes of stock.Cardinal has maintained this ownership interest for more than four years.In the current year,Cardinal liquidates Finch Corporation and acquires assets worth $1,300,000 and with an adjusted basis to Finch of $750,000.At the time of liquidation,Finch had E & P of $400,000,and a short-term capital loss carryover of $25,000. a.What is the recognized gain or loss to Finch and to Cardinal as a result of Finch's liquidation? b.What basis will Cardinal Corporation have in the assets acquired from Finch Corporation? c.What happens to Finch's E & P and short-term capital loss carryover?

Jill has a capital loss carryover in the current tax year of $50,000.She owns 2,000 shares of stock in Black Corporation which she purchased nine years ago for $60 per share.In the current year,Black Corporation redeems all of her shares for $350,000.Black Corporation has adequate E & P to cause any distribution to be dividend income.Jill is in the 35% tax bracket.What are the tax consequences to Jill if: a.The redemption qualifies for sale or exchange treatment, and Jill has no other transactions in the current year involving capital assets? b.The redemption does not qualify for sale or exchange treatment?

Brown Corporation has 1,000 shares of common stock outstanding.Bob owns 300 of the shares,Bob's mother owns 300 shares,Bob's daughter owns 50 shares,and Bob's sister owns 50 shares.Black Corporation owns 200 shares.Bob owns 70% of the stock in Black Corporation. a.Applying the stock attribution rules applicable in the case of a stock redemption, how many shares does Bob own in Brown Corporation? a., above, augmented by BZ's ownership of Brown shares? b.Assume Bob owns only 45% of Black Corporation. How many shares does Bob own, directly or indirectly, in Brown Corporation? c.Assume Bob owns 40% of BZ Partnership and that the partnership owns 100 shares in Brown Corporation. How many shares does Bob own in Brown Corporation assuming the same facts as in

Kingbird Corporation (E & P $400,000)has 2,000 shares of stock outstanding.That stock is held by Amata (1,200 shares)and Esteban (800 shares),who are unrelated individuals.Kingbird redeems 500 of Amata's shares for $250 per share.Amata paid $70 per share for her Kingbird stock nine years ago.Which of the following statements is correct with respect to the stock redemption?

Pursuant to a complete liquidation,Woodpecker Corporation distributes the following assets to its unrelated shareholders: land held as an investment (basis of $400,000,fair market value of $250,000),inventory (basis of $260,000,fair market value of $290,000),and marketable securities (basis of $100,000,fair market value of $160,000).What are the tax results to Woodpecker Corporation as a result of the liquidation? (Woodpecker Corporation has held the land for six years and the securities for two years.)

In a redemption to pay death taxes,stock in corporations in which the decedent held a 20% or more interest is treated as stock in a single corporation for purposes of determining whether the value of stock owned by the decedent exceeds 35% of the value of the decedent's adjusted gross estate.

A sale of preferred stock that is § 306 stock typically results in ordinary income to the shareholder.

Canary Corporation has 1,000 shares of stock outstanding.It redeems in a qualifying stock redemption 300 shares for $350,000 at a time when it has paid-in capital of $100,000 and E & P of $1 million.What would be the charge to E & P as a result of the redemption?

The adjusted gross estate of Keith,decedent,is $4 million.Included in the gross estate is stock in Gold Corporation (E & P of $900,000),a closely held corporation,valued at $2 million as of the date of Keith's death.Keith had acquired the stock twelve years ago at a cost of $280,000.Death taxes and funeral and administration expenses for Keith's estate are $500,000.Gold Corporation redeems one-fourth of the stock from Keith's estate in a § 303 redemption to pay death taxes using property with a fair market value of $500,000 and an adjusted basis to Gold Corporation of $350,000.

What are the tax consequences of a qualifying stock redemption to the distributing corporation?