Exam 6: Corporations: Redemptions and Liquidations

In general, if a shareholder's ownership interest is not diminished as a result of a stock redemption, the Code will treat the transaction as a sale or exchange.

One advantage of acquiring a corporation via an asset purchase instead of a stock purchase is that an asset purchase avoids the transfer of the acquired corporation's liabilities.

On March 15, 2013, Blue Corporation purchased 10% of the Gold Corporation stock outstanding. Blue Corporation purchased an additional 40% of the stock in Gold on October 24, 2013, and an additional 25% on April 4, 2014. On July 23, 2014, Blue Corporation purchased the remaining 25% of Gold Corporation stock outstanding. a. For purposes of the § 338 election, on what date does a qualified stock purchase occur? b. What is the due date for making the § 338 election?

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, 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. a. What are the tax consequences to the estate if all of its Wren stock is redeemed by Wren Corporation for $980,000? b. What are the tax consequences to the estate if all of its Tern stock is redeemed by Tern Corporation for $1.4 million?

Starling Corporation was organized fifteen years ago to construct office furniture. Eight years ago, Starling began a fast food business. In the current year, Starling discontinues its fast food business and sells all of the assets used in that business for $2 million. Further, Starling distributes the entire sales proceeds in a pro rata redemption of 250 shares of stock from each of its two equal shareholders-Morgan, an individual, and Magpie Corporation (i.e., 500 shares in total redeemed). Morgan has a basis of $100,000 in her redeemed stock, Magpie Corporation has a basis of $125,000 in its redeemed stock, and both shareholders have held their stock interest in Starling for several years. Starling Corporation has E & P of $4 million and 2,000 shares outstanding at the time of the distribution. What are the tax consequences of the stock redemption to Morgan, to Magpie Corporation, and to Starling Corporation?

Pursuant to a liquidation, Coral Corporation distributes to Lucinda, a shareholder, land (basis of $90,000, fair market value of $200,000). The land is subject to a $75,000 liability. Lucinda will have a basis of $125,000 in the land.

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 § 306 stock with regards to Nancy.

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 not have dividend income as a result of the sale of Beige stock.

To qualify a partial liquidation under the termination of a business test, the distribution must consist of the assets of a qualified trade or business.

The built­in 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.

Penguin Corporation purchased bonds (basis of $190,000) 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 $200,000 (basis of $160,000) to Penguin. Which of the following statements is correct with respect to the distribution of land?

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 $300,000 as a result of the distribution.

If a parent corporation makes a § 338 election, the subsidiary corporation recognizes gain but not loss on the deemed sale of its assets on the qualified stock purchase date.

Hawk Corporation has 2,000 shares of stock outstanding: Marina owns 800 shares, Russell owns 500 shares, Velvet Partnership owns 400 shares, and Yellow Corporation owns 300 shares. Marina and Russell, unrelated individuals, are equal partners of Velvet Partnership. Marina owns 35% of the stock in Yellow Corporation. a. Applying the § 318 stock attribution rules, determine how many shares in Hawk Corporation each shareholder owns, directly and indirectly: Marina: Russell: Velvet Partnership: Yellow Corporation: b. Assume, instead, that Marina owns 60% of Yellow Corporation. How many shares does Marina own, directly and indirectly, in Hawk Corporation?

After a plan of complete liquidation has been adopted, Condor Corporation sells its only asset, land (basis of $220,000), to Eduardo (an unrelated party) for $300,000. Under the terms of the sale, Condor Corporation receives cash of $50,000 and Eduardo's notes for the balance of $250,000. The notes are payable over the next five years ($50,000 per year) and carry an appropriate interest rate. Immediately after the sale, Condor Corporation distributes the cash and notes to Maria, the sole shareholder of Condor Corporation. Maria has a basis of $30,000 in the Condor stock. The installment notes have a value equal to their face amount. If Maria wishes to defer as much gain as possible on the transaction, which of the following is correct?

The gross estate of John, decedent, includes stock in Crimson Corporation and Jade Corporation valued at $1.3 million and $2 million, respectively. John's adjusted gross estate is $9 million. He owned 23% of the Crimson stock and 31% of the Jade stock. Immediate members of John's family own the remaining shares of both Crimson and Jade. Those individuals are also the sole beneficiaries of John's estate. Death taxes and funeral and administration expenses for John's estate are $1.3 million. John had a basis of $475,000 in the Crimson stock and $510,000 in the Jade stock. Crimson Corporation (E & P of $3 million) distributed land worth $1.3 million (basis of $800,000) to John's estate in redemption of all of the Crimson stock. Which of the following is a correct statement regarding the tax consequences of this redemption?

In applying the § 318 stock attribution rules to a stock redemption, a shareholder is treated as owning the stock of her spouse, children, grandchildren, parents, and siblings.

For purposes of a partial liquidation, the termination of a business test is a subjective test that should be relied upon only after obtaining a favorable ruling from the IRS.

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:

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 $850,000, the same as Brown's basis in its Green stock.