Exam 6: Corporations: Redemptions and Liquidations

Warbler Corporation distributes all of its property in a complete liquidation.Kena,a shareholder,receives $7,000 cash and land having a fair market value of $120,000.Warbler had purchased the land three years ago for $105,000.Kena has a $22,000 basis in her Warbler stock.What is Kena's basis in the land received in the liquidation of Warbler?

Compare the sale of a corporation's assets with a sale of its stock in terms of problems to the seller.

Grace owns 100% of Red Corporation and 100% of White Corporation.Both corporations have significant amounts of E & P.Grace sells 20 shares of Red Corporation stock (basis of $5,000)to White Corporation for $50,000.Grace has dividend income of $50,000 on the transaction.

Ali,a corporate executive,is in the 35% tax bracket.He acquired 1,000 shares of stock in Cardinal Corporation seven years ago for $200 a share.In the current year,Cardinal Corporation redeems all of his shares for $500,000.Cardinal Corporation has adequate E & P to cause any distribution to be dividend income.What are the tax consequences to Ali if: a.The redemption qualifies for sale or exchange treatment, and Ali has no other transactions in the current year involving capital assets? b.The redemption does not qualify for sale or exchange treatment?

Yellow Corporation transfers land (basis of $120,000,fair market value of $260,000)to Joe,a shareholder,to carry out a qualified stock redemption.The land is distributed subject to a $150,000 liability.With respect to the redemption:

On April 12,2007,Crow Corporation acquired land in a transaction that qualified under § 351.The land had a basis of $350,000 to the contributing shareholder and a fair market value of $200,000.Assume that the shareholder also transferred equipment (basis of $30,000,fair market value of $180,000)in the same § 351 exchange.Crow Corporation adopted a plan of liquidation on October 3,2008.On December 4,2008,Crow Corporation distributes the land to Ali,a shareholder who owns 20% of the stock in Crow Corporation.Value of the land has declined to $130,000 on the date of the distribution to Ali.Crow Corporation acquired the land to use as security for a loan it had hoped to obtain from a local bank.In negotiating with the bank for a loan,the bank required the additional capital investment as a condition of its making a loan to Crow Corporation.How much loss can Crow Corporation recognize on the distribution of the land?

Abel owns all the stock of both Beige Corporation and Brown Corporation.Both corporations have significant amounts of E & P.Abel sells some of his stock in Beige to Brown Corporation.Since the transaction was not a stock redemption by Beige,Abel has avoided the qualifying stock redemption provisions.

The gross estate of Katheryn,decedent,includes stock in Yellow Corporation and Violet Corporation valued at $500,000 and $600,000,respectively.Katheryn's adjusted gross estate is $3 million.She owned 22% of the Yellow stock and 27% of the Violet stock.Immediate members of Katheryn's family own the remaining shares of both Yellow and Violet.Those individuals are also the sole beneficiaries of Katheryn's estate.Death taxes and funeral and administration expenses for Katheryn's estate are $500,000.Katheryn had a basis of $230,000 in the Yellow stock and $310,000 in the Violet stock.Yellow Corporation (E & P of $800,000)distributed land worth $500,000 (basis of $420,000)to Katheryn's estate in redemption of all of the Yellow stock.Which of the following is a correct statement regarding the tax consequences of this redemption?

Flamingo Corporation (E & P of $700,000)has 1,000 shares of stock outstanding.Jaime owns 400 shares,Lupe (Jaime's daughter)owns 400 shares,and the remaining 200 shares are owned by unrelated individuals.In an effort to raise funds for another investment,Jaime convinces Flamingo to redeem all of his shares for $380,000.Jaime acquired the stock seven years ago for $60,000.After the redemption,Jaime continued to serve as Flamingo's controller but Gabriella assumed his role as a member of the corporation's board of directors.As a result of the transaction,Jaime must recognize:

In a corporate liquidation governed by § 332,what considerations should be given in the distribution of property to a minority shareholder?

Hazel,Emily,and Frank,unrelated individuals,own all of the stock in Wren Corporation (E & P of $900,000)as follows: Hazel,100 shares; Emily,100 shares; and Frank,400 shares.Wren redeems 150 of Frank's shares (basis of $60,000)for $150,000.With respect to the distribution in redemption of the stock:

After a complete liquidation has been adopted,Wren Corporation sells its only asset,unimproved land (basis of $200,000)held as an investment.The land is sold to Seth (an unrelated party)for $500,000.Under the terms of the sale,Wren Corporation receives cash of $100,000 and Seth's notes for the balance of $400,000.The notes are payable over the succeeding 5 years ($80,000 per year)and carry an appropriate rate of interest.Immediately after the sale,Wren Corporation distributes the cash and notes to Adam,the sole shareholder of Wren.Adam has an adjusted basis of $150,000 in the Wren stock.The installment notes have a value equal to their face amount of $400,000. a.How will Wren Corporation be taxed on the distribution? b.How will Adam be taxed on his receipt of the cash and notes?

Section 332 cannot apply to a parent-subsidiary liquidation if the subsidiary corporation is insolvent on the date of the liquidation.

In a complete liquidation (not a parent-subsidiary liquidation),a shareholder typically recognizes dividend income equal to his or her share (i.e.,stock ownership percentage)of the liquidating corporation's E & P.

Three years ago,Loon Corporation purchased 100% of the stock of Pelican Corporation for $720,000.Pelican Corporation has a basis of $500,000 in its assets,but the assets currently have a fair market value of $800,000.If Loon liquidates Pelican,what basis will Loon have in the assets it acquires from Pelican Corporation?

Discuss when stock is treated as § 306 stock.

Which of the following statements is correct with respect to the § 338 election?

In comparing a qualifying stock redemption with a complete liquidation,which of the following statements is incorrect?

For purposes of the § 338 election,a corporation must acquire,in a taxable transaction,at least 80% of the stock (voting power and value)of another corporation within an 12-month period.

The adjusted gross estate of Debra,decedent,is $5 million.Debra's estate will incur death taxes and funeral and administration expenses of $800,000.Debra's gross estate includes stock in Silver Corporation (fair market value of $2 million,basis to Debra of $900,000).Debra owned 90% of the stock in Silver Corporation.Silver Corporation redeems all of the estate's stock in the corporation for $2 million.Silver Corporation has E & P of $4 million.Debra's will names her daughter,Dena,who owns the remaining 10% interest in Silver Corporation,as her sole heir.With respect to this redemption,Debra's estate has the following income: