Exam 19: Corporations: Distributions Not in Complete Liquidation

Betty's adjusted gross estate is $9 million.The death taxes and funeral and administration expenses of her estate total $1.2 million.Included in Betty's gross estate is stock in Heron Corporation, valued at $3.3 million as of the date of her death in 2012.Betty had acquired the stock six years ago at a cost of $810,000.If Heron Corporation redeems $1.2 million of Heron stock from the estate, the transaction will qualify under § 303 as a redemption to pay death taxes and receive sale or exchange treatment.

Which of the following is not a consequence of the double tax on dividends?

Under certain circumstances, a distribution can generate (or add to) a deficit in E & P.

Ashley and Andrew, equal shareholders in Parrot Corporation, receive $250,000 each in distributions on December 31 of the current year.During the current year, Parrot sold an appreciated asset for $500,000 (basis of $150,000). Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year, with interest payable at a rate of 7.5%.Before considering the effect of the asset sale, Parrot's current year E & P is $400,000 and it has no accumulated E & P. How much of Ashley's distribution will be taxed as a dividend?

Robin Corporation distributes furniture (basis of $40,000; fair market value of $50,000) as a property dividend to its shareholders.The furniture is subject to a liability of $55,000.Robin Corporation recognizes gain of:

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.

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?

Tanya is in the 35% tax bracket. She acquired 1,000 shares of stock in Swan Corporation seven years ago for $250 a share. In the current year, Swan Corporation (E & P of $1.2 million) redeems all of her shares for $400,000. What are the tax consequences to Tanya if:

In determining whether a distribution qualifies as a § 303 redemption to pay death taxes, the stock attribution rules must be applied.

Keshia owns 200 shares in Parakeet Corporation. Keshia has a 30% beneficiary interest in her deceased grandmother's estate. The estate owns 400 shares in Parakeet Corporation. None of the other beneficiaries of the estate own stock in Parakeet. In applying the § 318 attribution rules:

On January 1, Tulip Corporation (a calendar year taxpayer) has accumulated E & P of $300,000.Its current E & P for the year is $90,000 (before considering dividend distributions).During the year, Tulip distributes $600,000 ($300,000 each) to its equal shareholders, Anne and Tom.Anne has a basis in her stock of $65,000, while Tom's basis is $120,000.What is the effect of the distribution by Tulip Corporation on Anne and Tom?

The gross estate of Raul, decedent who died in 2012, includes 1,500 shares of stock of Orange Corporation (basis to Raul of $600,000, fair market value on date of death of $4.1 million). The estate will incur $2.2 million of death taxes and funeral and administration expenses, and the adjusted gross estate is $9 million. Denise, Raul's daughter and sole heir of his estate, owns the remaining 500 shares of Orange Corporation's (2,000) shares outstanding. In the current year, Orange (E & P of $5 million) redeems all of the estate's 1,500 shares for $4.1 million. What are the tax consequences of the redemption to Raul's estate?

Pink Corporation declares a nontaxable dividend payable in rights to subscribe to common stock.Each right entitles the holder to purchase one share of stock for $25.One right is issued for every two shares of stock owned.Jack owns 100 shares of stock in Pink, which he purchased three years ago for $3,000.At the time of the distribution, the value of the stock is $45 per share and the value of the rights is $2 per share.Jack receives 50 rights.He exercises 25 rights and sells the remaining 25 rights three months later for $2.50 per right.

Gander, a calendar year corporation, has a deficit in current E & P of $100,000 and a $290,000 positive balance in accumulated E & P. If Gander determines that a $500,000 distribution to its shareholders is appropriate at some point during the year, what is the maximum amount of the distribution that could potentially be treated as a dividend?

Falcon Corporation ended its first year of operations with taxable income of $250,000.At the time of Falcon's formation, it incurred $50,000 of organizational expenses.In calculating its taxable income for the year, Falcon claimed an $8,000 deduction for the organizational expenses.What is Falcon's current E & P?

A loss in current E & P is treated as occurring ratably during the year, unless the taxpayer can show otherwise.

When computing current E & P, taxable income is not adjusted for the deferred gain in a § 1031 like-kind exchange.

Ten years ago, Carrie purchased 2,000 shares in Osprey Corporation for $20,000.In the current year, Carrie receives a nontaxable stock dividend of 20 shares of Osprey preferred.Values at the time of the dividend are: $8,000 for the preferred stock and $72,000 for the common.Based on this information, Carrie's basis in the stock is:

Federal income tax paid in the current year must be subtracted from taxable income to determine E & P.

If stock rights are taxable, the recipient has income to the extent of the fair market value of the rights.