Exam 6: Corporations: Redemptions and Liquidations

Bluebird Corporation's 500 shares outstanding are owned as follows: Lucinda,200 shares; Carl (Lucinda's father),100 shares; and Nancy (Lucinda's sister),200 shares.During the current year,Bluebird (E & P of $800,000)redeemed 80 shares of Lucinda's stock for $60,000.If Lucinda had acquired the 80 shares five years ago for $10,000,she will have a long-term capital gain of $50,000 from the redemption.

For purposes of a partial liquidation,the "not essentially equivalent to a dividend" test is applied at the shareholder level.

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

A corporate distribution to a noncorporate shareholder that is a return from the shareholder's investment receives more favorable tax treatment than a distribution that is a return of the shareholder's investment.

Skylark Corporation owns 100% of the outstanding stock of Quail Corporation,having purchased the stock 5 years ago for $310,000.Pursuant to a plan of liquidation adopted by Quail Corporation on March 4,2008,Quail distributes all its property on December 1,2008,to its shareholder.Quail Corporation had never been insolvent and had E & P of $420,000 on the date of liquidation.Pursuant to the liquidation,Quail distributed property worth $390,000 (basis $325,000)to Skylark Corporation.How much gain must the parties recognize in 2008 on the transfer of this property to Skylark Corporation?

Grace receives as a nontaxable stock dividend preferred stock with a § 306 taint of $200,000 to which she assigns a basis of $30,000.Assume the common stock upon which the preferred stock was issued has been held as an investment for four years.One month after the stock dividend and when it has a fair market value of $200,000,Grace contributes the preferred stock to a qualified charitable organization.With respect to the charitable contribution:

With respect to a redemption that is a partial liquidation,which of the following statements is true?

Pursuant to a complete liquidation,Oriole Corporation distributes to its shareholders land with a basis of $600,000 and a fair market value of $750,000.The land is subject to a liability of $800,000.What is Oriole's recognized gain or loss on the distribution?

Both the corporation and its shareholders may defer gain,to the point of collection,on a liquidating distribution of installment notes obtained by the corporation in the sale of its assets.

Noncorporate and corporate shareholders typically do not have the same preference for the tax treatment of a stock redemption.Explain why noncorporate taxpayers normally prefer sale or exchange treatment for a stock redemption,and why corporate taxpayers normally prefer dividend treatment for a stock redemption.

In applying the stock attribution rules to a stock redemption,a shareholder is treated as owning the stock of her grandchildren.

The stock in Lark Corporation is owned equally by Olaf and his grandson Pete.In a liquidation of the corporation in the current year,Lark Corporation distributes land that it purchased in 2006 for $300,000 to Olaf.The property has a fair market value on the date of distribution of $260,000.One year later,Olaf sells the land for $240,000.What loss will Lark Corporation recognize with respect to the distribution of the land?

Brown Corporation purchased 90% of the stock of Green Corporation five years ago for $800,000.In the current year,Brown Corporation liquidates Green Corporation and acquires assets with a basis to Green Corporation of $900,000 (fair market value of $1.2 million).Brown Corporation will have a basis in the assets of $900,000,the same as Green's basis in the assets.

In March of the current year,Loon Corporation (a calendar year corporation)made a distribution in redemption of some of its shares.At that time,Loon incurred redemption-related expenditures totaling $50,000 (consisting of accounting fees of $20,000,legal fees of $25,000,and brokerage fees of $5,000).The distribution was a qualifying stock redemption.How much of the $50,000 is deductible in the current year?

Betty's adjusted gross estate is $3 million.The death taxes and funeral and administration expenses of her estate total $500,000.Included in Betty's estate is stock in Heron Corporation,valued at $900,000 as of the date of death.Betty had acquired the stock six years ago at a cost of $175,000.If Heron Corporation redeems $500,000 of Heron stock from the estate,the transaction will qualify under § 303 as a redemption to pay death taxes and receive sale or exchange treatment.

Corbin sold 100 shares of § 306 stock (basis of $4,000)in Owl Corporation to Linda (an unrelated individual)for $20,000.When the § 306 stock was issued to Corbin,the stock had a value of $20,000,and Owl's E & P was $500,000.At the time of the stock sale to Linda,Owl has E & P of $600,000,and Corbin has 600 shares of common stock (basis of $76,000)in Owl.With respect to the § 306 stock sale:

Joe owns 100% of Green Corporation (E & P of $500,000)and 100% of Navy Corporation (E & P of $400,000).Joe sells 100 shares in Green (basis of $15,000)to Navy for $40,000,its fair market value.Joe purchased the stock in Green six years ago.Joe has:

Gains and losses are recognized to a subsidiary corporation if the parent corporation makes the § 338 election.

Magenta Corporation acquired land in a § 351 exchange in 2007.The land had a basis of $450,000 and a fair market value of $520,000 on the date of the transfer.Magenta Corporation has two equal shareholders,Mark and Megan,who are father and daughter.Magenta Corporation adopts a plan of liquidation in the current year.On this date,the land has decreased in value to $390,000.Magenta Corporation sells the land for $390,000 and distributes the proceeds pro rata to Mark and Megan.What amount of loss may Magenta Corporation recognize on the sale of the land?

If a parent corporation makes a § 338 election,the subsidiary is treated as a new corporation as of the day following the qualified stock purchase date.