Exam 6: Corporations: Redemptions and Liquidations

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?

A corporation generally will recognize gain or loss on a liquidating distribution of installment notes to its shareholders.

Yolanda owns 60% of the outstanding stock of Amber Corporation.In a qualifying stock redemption,Amber distributes $20,000 to Yolanda in exchange for one-half of her shares (basis of $35,000).As a result of the redemption,Yolanda has a recognized capital loss of $15,000.

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:

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.

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.

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:

For purposes of a partial liquidation,a distribution is not essentially equivalent to a dividend if it results in a genuine contraction of the business of the corporation.

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 2012,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.

Ember Corporation has 500 shares of stock outstanding: Zoe owns 170 shares,Leticia owns 95 shares,and Samuel owns 55 shares.Sage Partnership owns the other 180 shares in Ember Corporation.Zoe,Leticia,and Samuel,all unrelated,are equal partners of the Sage Partnership.In applying the stock attribution rules under § 318:

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.

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.

Hawk Corporation has 2,000 shares of stock outstanding: Marina owns 700 shares,Russell owns 600 shares,Velvet Partnership owns 300 shares,and Yellow Corporation owns 400 shares.Marina and Russell,unrelated individuals,are equal partners of Velvet Partnership.Marina owns 25% of the stock in Yellow Corporation.

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

A parent corporation must make the § 338 election by the fifteenth day of the third month following the close of the tax year in which a qualified stock purchase occurs.

Mary and Jane,unrelated taxpayers,own Gray Corporation's stock equally.One year before the complete liquidation of Gray,Mary transfers land (basis of $420,000,fair market value of $350,000)to Gray Corporation as a contribution to capital.Assume that Mary also contributed other property in the same transaction having a basis of $20,000 and fair market value of $95,000.In liquidation,Gray distributes the land to Jane.At the time of the liquidation,the land is worth $290,000.

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:

In the current year,Dove Corporation (E & P of $1 million)distributes all of its property in a complete liquidation.Alexandra,a shareholder,receives land having a fair market value of $100,000.Dove Corporation had purchased the land as an investment three years ago for $75,000,and the land was distributed subject to a $70,000 liability.Alexandra took the land subject to the $70,000 liability.What is Alexandra's basis in the land?

For purposes of the § 338 election,a corporation must acquire,in a taxable transaction,at least 80% of the stock (voting power and value)of another corporation within an 12-month period.

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.