Exam 6: Corporations: Redemptions and Liquidations

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?

Julian, Berta, and Maria own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation (E & P of $750,000). Berta is Julian's sister, and Maria is Julian's aunt. Caramel Corporation redeems all of Julian's stock for $420,000. Julian paid $200 a share for the stock five years ago. Julian continued to serve on Caramel's board of directors after the redemption. With respect to the redemption:

Pursuant to a complete liquidation, Oriole Corporation distributes to its shareholders land with a basis of $450,000 and a fair market value of $550,000. The land is subject to a liability of $600,000. What is Oriole's recognized gain or loss on the distribution?

Jill has a capital loss carryover in the current tax year of $80,000. She owns 1,000 shares of stock in Black Corporation which she purchased nine years ago for $75 per share. In the current year, Black Corporation (E & P of $800,000) redeems all of her shares for $600,000. Jill is in the 35% tax bracket. What are the tax consequences to Jill if:

Magenta Corporation acquired land in a § 351 exchange one year ago. The land had a basis of $320,000 and a fair market value of $350,000 on the date of the transfer. Magenta Corporation has two shareholders, Mark (70%) and Megan (30%), who are brother and sister. Magenta Corporation adopts a plan of liquidation in the current year. On this date, the land has decreased in value to $250,000. Magenta Corporation sells the land for $250,000 and distributes the proceeds pro rata to Mark and Megan. What amount of loss may Magenta Corporation recognize on the sale of the land?

A subsidiary corporation is liquidated at a time when it is indebted to its parent corporation. The subsidiary corporation distributes property to the parent corporation in satisfaction of the indebtedness. If the liquidation is governed by § 332, neither the subsidiary nor the parent recognize gain or loss on the transfer of property in satisfaction of indebtedness.

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 $100,000 and a fair market value of $270,000 on the date of the transfer. In the current year, Blue Corporation (E & P of $800,000) redeems 250 shares from Eleanor for $220,000 in a transaction that does not qualify for sale or exchange treatment. With respect to the redemption, Eleanor will have a:

Which of the following is an incorrect statement regarding the tax consequences of a § 306 stock sale?

The stock of Brown Corporation (E & P of $680,000) is owned as follows: 80% by Orange Corporation (basis of $620,000), and 20% by Susanna (basis of $155,000). Both shareholders purchased their shares in Brown five years ago. In the current year, Brown Corporation liquidates and distributes land (fair market value of $800,000, basis of $970,000) to Orange Corporation, and securities (fair market value of $200,000, basis of $160,000) to Susanna. Which of the following statements is incorrect with respect to the tax consequences resulting from these distributions?

Sally and her mother are the sole shareholders of Owl Corporation. During the current year, Owl distributes cash in redemption of all of Sally's stock. Sally continues to be employed as controller for Owl after the redemption. The distribution is a complete termination redemption resulting in sale or exchange treatment for Sally.

A shareholder's basis in property received in a stock redemption is the property's fair market value.

The stock in Tangerine Corporation is held by two unrelated individuals, Janet (60%) and Joaquin (40%). One year before the liquidation of Tangerine, the shareholders transfer properties to the corporation in a transaction that qualifies under § 351. Included in that transfer was land (basis of $600,000, fair market value of $650,000). Pursuant to its liquidation in the current year, Tangerine Corporation distributes the land (now worth $500,000) pro rata to the shareholders. What amount of loss will Tangerine recognize on the distribution?

Three years ago, Darlene received preferred (§ 306) stock pursuant to a nontaxable stock dividend from Grackle Corporation. In the current year, Darlene gives the Grackle preferred stock to her sister, Nancy. The Grackle preferred stock is not § 306 stock with regards to Nancy.

Puffin Corporation's 2,000 shares outstanding are owned as follows: Paul, 800 shares; Sandra (Paul's sister), 800 shares; and Greta (Paul's granddaughter), 400 shares. During the current year, Puffin (E & P of $1 million) redeemed 600 shares of Paul's stock for $100,000. If Paul had acquired the 600 shares five years ago for $30,000, he will have a long-term capital gain of $70,000 from the redemption.

When a shareholder receives property subject to a liability pursuant to a complete liquidation (not a parent-subsidiary liquidation), the fair market value of the property is reduced by the amount of the liability in computing the shareholder's gain (or loss) on the liquidation.

Kite Corporation has 1,000 shares of stock outstanding. Kent owns 250 shares, Kent's father owns 150 shares, Kent's brother owns 250 shares, and Kent's son owns 50 shares. Plover Corporation owns the other 300 shares in Kite Corporation. Kent owns 60% of the stock in Plover Corporation. Applying the § 318 stock attribution rules, how many shares does Kent own in Kite Corporation?

Pursuant to a complete liquidation, Woodpecker Corporation distributes the following assets to its unrelated shareholders: land held for six years as an investment (basis of $100,000, fair market value of $300,000), inventory (basis of $100,000, fair market value of $140,000), and marketable securities held for two years as an investment (basis of $200,000, fair market value of $120,000). What are the tax results to Woodpecker Corporation as a result of the liquidation?

The built-in loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property's fair market value after its transfer to the corporation.

Vireo Corporation redeemed shares from its sole shareholder pursuant to a written agreement between the parties that clearly identified the transaction as a stock redemption (and not a dividend distribution). Since the agreement is binding under state law, the shareholder will receive sale or exchange treatment with respect to the redemption.

Fred is the sole shareholder of Puce Corporation, having a basis of $90,000 in 1,000 shares of Puce common stock. Last year, Puce (E & P of $500,000) issued a dividend of 2,000 shares of preferred stock to Fred. On the date of distribution, the fair market values per share of the common and preferred stocks were $160 and $20, respectively. In the current year, Puce (E & P of $720,000) redeems all of Fred's preferred stock for its fair market value of $40,000.