Exam 6: Corporations: Redemptions and Liquidations

For a stock redemption to qualify for sale or exchange treatment under § 303 (redemption to pay death taxes), it need not satisfy any of the § 302 redemption provisions.

The adjusted gross estate of Debra, decedent, is $8 million. Debra's estate will incur death taxes and funeral and administration expenses of $1 million. Debra's gross estate includes stock in Silver Corporation that she had purchased twelve years ago for $600,000 (date of death fair market value of $3 million). At the time of her death in 2011, Debra owned 80% of the stock in Silver Corporation. Silver Corporation (E & P of $4 million) redeems all of the estate's stock in the corporation for $3 million. Debra's will names her daughter, Dena, who owns the remaining 20% interest in Silver Corporation, as her sole heir. With respect to this redemption, Debra's estate has the following income:

Brown Corporation purchased 85% of the stock of Green Corporation five years ago for $850,000. In the current year, Brown Corporation liquidates Green Corporation and acquires assets with a basis to Green Corporation of $700,000 (fair market value of $1.1 million). Brown Corporation will have a basis in the assets of $700,000, the same as Green's basis in the assets.

Discuss the tax consequences associated with a sale of § 306 stock. Can the § 306 rules have a harsher tax result than if the corporation had distributed a taxable dividend in the first place?

Grackle Corporation (E & P of $600,000) distributes cash of $200,000 and land (fair market value of $400,000; basis of $250,000) to a shareholder in a qualifying stock redemption. The land distributed is subject to a mortgage of $460,000. Grackle will recognize a gain of $150,000 as a result of the distribution.

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. The loan to Robin Corporation constitutes a prohibited interest for purposes of the family attribution waiver.

In a not essentially equivalent redemption [§ 302(b)(1)], the meaningful reduction test is an objective safe harbor rule that taxpayers can rely upon for sale or exchange treatment.

In 2008, 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 2011, Floyd receives stock in Gray Corporation as a gift from his father. Floyd has acquired a prohibited interest within the 10-year postredemption period and, as a result, the 2008 redemption no longer qualifies as a complete termination redemption.

Purple Corporation has two equal shareholders, Joshua and Ellie, who are father and daughter. One year ago, the two shareholders transferred properties to Purple in a § 351 exchange. Joshua transferred land (basis of $400,000, fair market value of $350,000) and securities (basis of $20,000, fair market value of $80,000), while Ellie transferred equipment (basis of $220,000, fair market value of $430,000). In the current year, Purple Corporation adopts a plan of liquidation, sells all of its assets, and distributes the proceeds pro rata to Joshua and Ellie. The only loss realized upon disposition of the properties was with respect to the undeveloped land that had decreased in value to $290,000 and was sold for this amount. Purple never used the land for any business purpose during the time it was owned by the corporation. What amount of loss can Purple Corporation recognize on the sale of the land?

During the current year, Ecru Corporation is liquidated and distributes its only asset, land, to Kena, the sole shareholder. On the date of distribution, the land has a basis of $300,000, a fair market value of $650,000, and is subject to a liability of $400,000. Kena, who takes the land subject to the liability, has a basis of $75,000 in the Ecru stock. With respect to the distribution of the land, which of the following statements is correct?

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

Penguin Corporation purchased bonds (basis of $95,000) of its 100% owned subsidiary, Finch Corporation, at a discount. Pursuant to a § 332 liquidation and in satisfaction of the indebtedness, Finch distributes land worth $100,000 (basis of $110,000) to Penguin. Which of the following statements is correct with respect to the distribution of land?

If a parent corporation makes a § 338 election, the subsidiary recognizes gains and losses as result of a deemed sale of its assets.

Lucinda owns 1,100 shares of Blackbird Corporation stock at a time when Blackbird has 2,000 shares of stock outstanding. The remaining shareholders are unrelated to Lucinda. What is the minimum number of shares Blackbird must redeem from Lucinda so that the transaction will qualify as a disproportionate redemption?

Sam's gross estate includes stock in Tern Corporation and Wren Corporation, valued at $1.4 million and $980,000, respectively. At the time of Sam's death in 2011, the stock represented 22% of Tern's outstanding stock and 27% of Wren's outstanding stock. Sam's adjusted gross estate equals $6,500,000. Death taxes and funeral and administration expenses for Sam's estate total $980,000. Sam had a basis of $350,000 in the Tern stock and $190,000 in the Wren stock at the time of his death. None of the beneficiaries of Sam's estate own (directly or indirectly) any stock in Tern Corporation, but some of the beneficiaries own stock of Wren Corporation. Consider the following independent questions.

The related-party loss limitation in a complete liquidation can apply to a distribution or sale of property while the built-in loss limitation applies only to distributions of property.

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.

Two years ago, Emily, the sole shareholder of Tan Corporation (E & P of $600,000), received a nontaxable stock dividend of 100 shares of preferred stock (fair market value of $100,000) from Tan. As a result of the stock dividend, Emily properly allocated $30,000 of her common stock basis to the preferred stock. One year ago, Emily made a gift of the preferred stock in Tan Corporation to her son, Matt. In the current year, Matt sells one-half of the shares of preferred stock to Betty, an unrelated party, for $50,000. With respect to the sale of the preferred stock by Matt:

For tax purposes, all stock redemptions are treated as dividend distributions.

The related-party loss limitation does not apply to a distribution of property in complete liquidation that was appreciated (fair market value greater than basis) when it was transferred to the corporation.