Exam 6: Corporations: Redemptions and Liquidations

Bob's adjusted gross estate is $5 million.Bob's estate will incur death taxes and funeral and administration expenses of $1 million.Bob's gross estate includes stock in Bluejay Corporation (date of death fair market value of $1,800,000,basis to Bob of $900,000).Bob owned 40% of the stock in Bluejay Corporation.Bluejay (E & P of $2 million)redeems all of the estate's stock for $1,800,000.Bob named his daughter,Bonnie,who has no interest in Bluejay,as his sole heir.Discuss the tax consequences of the redemption.

Blackbird Corporation owns 400 shares in Hawk Corporation.Luisa owns 600 shares in Hawk Corporation and 800 shares in Blackbird Corporation.The 800 shares represent an 80% interest in Blackbird.In applying the § 318 attribution rules:

White Corporation has manufactured lawn furniture for 6 years.In addition,for the last 3 years,White has operated a separate division that sells barbecue equipment.Helen,an individual,and Gray Corporation each acquired 100 shares of stock in White (basis of $10,000 per share)10 years ago.In the current year,the barbecue equipment division is entirely destroyed by fire.White Corporation decides to discontinue the business and distributes all of the $4 million of insurance proceeds collected as a result of the fire to Helen and Gray Corporation in redemption of 20 shares of stock from each shareholder.Determine the tax consequences of the stock redemption to White Corporation (E & P of $7 million),to Gray Corporation,and to Helen.

Why is the redemption to pay death taxes a uniquely advantageous qualifying stock redemption provision?

Brenda owns 600 shares of Eagle Corporation stock at a time when Eagle has 1,000 shares of stock outstanding.The remaining shareholders are unrelated to Brenda.What is the minimum number of shares Eagle must redeem from Brenda so that the transaction will qualify as a disproportionate redemption?

One difference between the tax treatment accorded nonliquidating and liquidating distributions is with respect to the basis of property received in the distributions.In a nonliquidating distribution (e.g.,qualifying stock redemption),the shareholder takes a basis in the property equal to the corporation's basis in the property,while the basis of property acquired in a liquidation is its fair market value on the date of the distribution.

Cardinal Corporation (E & P of $700,000)has 1,000 shares of stock outstanding.Lupita owns 300 shares of Cardinal stock,Berta (Lupita's sister)owns 500 shares,and April (Lupita's daughter)owns 200 shares.The corporation redeems 200 shares of Lupita's stock for $100,000.Lupita paid $100 a share for the stock five years ago.With respect to the redemption:

James and his son are the sole shareholders of Wren Corporation.During the current year,Wren distributes cash in redemption of all of James's stock.James continues to serve on the board of directors of Wren Corporation.The distribution is a complete termination redemption resulting in sale or exchange treatment for James.

After a plan of complete liquidation has been adopted,Condor Corporation sells its only asset,land (basis of $300,000),to Eduardo (an unrelated party)for $700,000.Under the terms of the sale,Condor Corporation receives cash of $200,000 and Eduardo's notes for the balance of $500,000.The notes are payable over the next five years ($100,000 per year)and carry an adequate interest rate.Immediately after the sale,Condor Corporation distributes the cash and notes to Maria,the sole shareholder of Condor Corporation.Maria has a basis of $105,000 in the Condor stock.The installment notes have a value equal to their face amount.If Maria wishes to defer as much gain as possible on the transaction,which of the following is correct?

The ordinary income resulting from a sale of § 306 stock is taxed at the shareholder's marginal tax rate.

At a time when Blackbird Corporation had E & P of $600,000 and 1,000 shares of stock outstanding,the corporation distributed $200,000 to redeem 200 shares of its stock.The transaction qualified as a disproportionate redemption for the shareholder.Blackbird's E & P is reduced by $120,000 as a result of the distribution.

The stock in Black Corporation is owned by Sam and Susan,who are unrelated.Sam owns 70% and Susan owns 30% of the stock in Black Corporation.The following assets are to be distributed in complete liquidation of Black Corporation: a.What gain or loss would Black Corporation recognize if it distributes the cash, inventory, and equipment to Sam and the land to Susan? b.What gain or loss would Black Corporation recognize if it distributes the cash, inventory, and land to Sam and the equipment to Susan?

During the current year,Goldfinch Corporation purchased 100% of the stock of Dove Corporation and made a qualified election under § 338.Which of the following statements is incorrect with respect to the § 338 election?

Explain the requirements for waiving the family attribution rules in the case of complete termination redemptions.

Keshia owns 500 shares in Parakeet Corporation.Keshia has a 40% beneficiary interest in her deceased grandmother's estate.The estate owns 600 shares in Parakeet Corporation.None of the other beneficiaries own stock in Parakeet.In applying the § 318 attribution rules:

An advantage of using a stock redemption to acquire shares from the estate of a deceased shareholder is that the other shareholders would not be required to use their own funds for the acquisition.

Pursuant to a qualifying stock redemption,Redbird Corporation (E & P of $500,000)transfers land held for investment purposes to Bob,a shareholder.On the date of the distribution,Redbird has a basis of $300,000 in the land and its fair market value is $260,000.With respect to the redemption:

For purposes of the related-party loss limitation in the context of a liquidating distribution,a corporation and a shareholder are considered related if the shareholder owns (directly or indirectly)more than 50% in value of the corporation's outstanding stock.

As a general rule,a liquidating corporation recognizes gains but not losses on the distribution of property in complete liquidation.

The stock of Cardinal Corporation is held as follows: 85% by Blue Jay Corporation (basis of $800,000)and 15% by Samuel (basis of $60,000).Cardinal Corporation is liquidated on October 20,2008,pursuant to a plan adopted on January 9,2008.Pursuant to the liquidation,Cardinal Corporation distributed Asset A (basis of $550,000,fair market value of $850,000)to Blue Jay,and Asset B (basis of $200,000,fair market value of $150,000)to Samuel.No election is made under § 338.With respect to the liquidation of Cardinal: