Exam 6: Corporations: Redemptions and Liquidations

What are the tax consequences of a § 332 liquidation to the parent corporation, subsidiary corporation, and minority shareholder?

For purposes of the application of § 304 (redemptions through the use of related corporations), a shareholder must own (direct or indirectly) at least 80% of the stock of two more corporations.

As a general rule, a liquidating corporation recognizes gains and losses on the distribution of property in complete liquidation.

The stock in Black Corporation is owned entirely by Nancy (80%) and Wanda (20%), mother and daughter. Three years ago, Nancy contributed land (basis of $200,000, fair market value of $250,000) to Black Corporation in a transaction that qualified under § 351. In the current year and pursuant to a complete liquidation of Black, the land is distributed proportionately to Nancy and Wanda. At the time of the liquidating distribution, the land had a fair market value of $100,000. What amount of loss will Black Corporation recognize on the distribution of the land?

Abel owns all the stock of both Beige Corporation and Brown Corporation. Both corporations have significant amounts of E & P. Abel sells some of his stock in Beige to Brown Corporation. Abel will have dividend income as a result of the sale of Beige stock.

Leon owns 400 shares of the 1,000 outstanding shares of Crane Corporation (E & P of $650,000). None of the other shareholders of Crane are related to Leon. Leon acquired his Crane shares ten years ago for $60,000. Crane has operated several trades or businesses for more than five years. In the current year, Crane sells the assets of one of those trades or businesses and distributes the proceeds from the asset sale to the shareholders in a pro rata stock redemption. In this transaction, Leon receives $180,000 in redemption of 250 shares of Crane. As a result of this transaction, Leon will recognize:

Vulture Corporation distributes land (basis of $250,000, fair market value of $475,000) to Bonita, a shareholder, to carry out a qualifying stock redemption. The land is distributed subject to a $300,000 liability. Bonita had a basis of $25,000 in the shares redeemed. With respect to the redemption:

The text discusses four different limitations on loss recognition by liquidating corporations. Provide a brief description of each of these loss limitations.

As a result of a redemption, a shareholder's interest (direct and indirect) in the corporation decreased from 58% to 45%. The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

Which of the following statements is correct with respect to a partial liquidation?

Pursuant to a qualifying stock redemption, Redbird Corporation (E & P of $400,000) transfers land held for investment purposes to Bob, a 10% shareholder. On the date of the distribution, Redbird has a basis of $200,000 in the land and its fair market value is $150,000. Bob has a basis of $40,000 in the shares redeemed. With respect to the redemption:

Hazel, Emily, and Frank, unrelated individuals, own all of the stock in Wren Corporation (E & P of $1.2 million) as follows: Hazel, 1,300 shares; Emily, 400 shares; and Frank, 300 shares. Wren redeems 300 of Hazel's shares (basis of $60,000) for $450,000. With respect to the distribution in redemption of the stock:

In applying the stock attribution rules to a stock redemption, stock owned by a shareholder who owns 65% of a corporation is deemed to be owned in full by the corporation.

When is a redemption to pay death taxes under § 303 most advantageous?

The gross estate of Raul, decedent who died in 2011, includes 700 shares of stock of Orange Corporation (basis to Raul of $400,000, fair market value on date of death of $3 million). The estate will incur $2 million of death taxes and funeral and administration expenses, and the adjusted gross estate is $8 million. Denise, Raul's daughter and sole heir of his estate, owns the remaining 300 shares of Orange Corporation's (1,000) shares outstanding. In the current year, Orange (E & P of $4 million) redeems all of the estate's 700 shares for $3 million. What are the tax consequences of the redemption to Raul's estate?

A shareholder's holding period of property acquired in a stock redemption begins on the date of the distribution.

In comparing a qualifying stock redemption with a complete liquidation, which of the following statements is incorrect?

Lupe and Rodrigo, father and son, each own 50% of the stock outstanding of Heron Corporation (E & P of $400,000). During the current year, Heron redeems all of Lupe's shares for $250,000. The transaction cannot qualify as a complete termination redemption if:

The Code treats corporate distributions that are a return from a shareholder's investment as sales or exchanges and corporate distributions that are a return of a shareholder's investment as dividends.

At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding, the corporation distributed $300,000 to redeem 400 shares of its stock. The transaction qualified as a disproportionate redemption for the shareholder. Blackbird's E & P is reduced by $280,000 as a result of the distribution.