Exam 6: Corporations: Redemptions and Liquidations

In 2003,Floyd carried out a successful complete termination redemption of his stock in Gray Corporation.Floyd was able to qualify the transaction as a complete termination redemption only by use of the family attribution waiver.In 2008,Floyd inherits stock in Gray Corporation from his father.Floyd has acquired a prohibited interest within the 10-year postredemption period and,as a result,the 2003 redemption no longer qualifies as a complete termination redemption.

As of January 1 of the current year,Grouse Corporation has E & P of $300,000.Lilly owns 320 shares of Grouse's common stock (basis of $45,000).On that date,Grouse declares and distributes a nontaxable preferred stock dividend,of which Lilly receives 100 shares.After the dividend,the fair market value of one share of Grouse common stock is $500,and the fair market value of one share of Grouse preferred stock is $200.Two months later,Lilly sells the 100 shares of the preferred stock to an unrelated individual for $20,000. a.What are Lilly's tax consequences resulting from the sale of the preferred stock? b.What is the effect on Grouse's E & P as a result of the sale of the preferred stock?

Which of the following is a correct statement regarding a redemption to pay death taxes under § 303?

Currently,Brown Corporation (E & P of $800,000)has 1,000 shares of common stock outstanding.Pat owns 200 shares.His wife,Abby,owns 200 shares,his daughter,Kate,owns 200 shares,and his father,Harold,owns 400 shares.Two years ago,Pat contributed $25,000 to Brown Corporation in exchange for 100 newly issued shares of nonvoting preferred stock.In the current year,Brown Corporation redeems Pat's preferred stock for $40,000,its fair market value.With respect to the distribution in redemption of the preferred stock:

Carol,Bonnie,and Ann,sisters,own 400 shares,400 shares,and 200 shares,respectively,in Teal Corporation (E & P of $800,000).Teal Corporation redeems all of Ann's stock for $120,000.Ann paid $50 a share for the stock five years ago.Ann continued to serve as president of Teal after the redemption.With respect to the 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.As a result of the loan,the redemption of Reginald's stock cannot qualify for sale or exchange treatment.

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 qualifies for sale or exchange treatment.With respect to the redemption,Eleanor will have a: