Exam 6: Corporations: Redemptions and Liquidations

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.

Currently,Brown Corporation (E & P of $800,000)has 1,000 shares of common stock outstanding.Pat owns 200 shares.His wife owns 400 shares,his daughter owns 100 shares,and his father owns 300 shares.Two years ago,Pat transferred $30,000 to Brown Corporation in exchange for 100 newly issued shares of nonvoting preferred stock.In the current year,Brown Corporation redeems Pat's preferred stock for $50,000,its fair market value.With respect to the distribution in redemption of the preferred stock:

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

As a general rule,a liquidating corporation recognizes gains but not losses on the distribution of property in complete liquidation.

The stock of Tan Corporation (E & P of $1.3 million)is owned as follows: 90% by Egret Corporation (basis of $520,000),and 10% by Zoe (basis of $55,000).Both shareholders acquired their shares in Tan more than six years ago.In the current year,Tan Corporation liquidates and distributes land (fair market value of $1.1 million,basis of $750,000)and equipment (fair market value of $700,000,basis of $410,000)to Egret Corporation,and securities (fair market value of $200,000,basis of $150,000)to Zoe.What are the tax consequences of these distributions to Egret,to Tan,and to Zoe?

The stock in Camel Corporation is owned by Albert and Tomoko,who are unrelated.Albert owns 30% and Tomoko owns 70% of the stock in Camel Corporation.All of Camel Corporation's assets were acquired by purchase.The following assets are to be distributed in complete liquidation of Camel Corporation:

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?

Swan Corporation incurred $10,000 of accounting fees and $15,000 of legal fees in connection with the redemption of stock from its shareholders.None of the expenditures are deductible by Swan.

The stock in Toucan Corporation is held equally by two brothers.Four years ago,the shareholders transfer property (basis of $200,000,fair market value of $220,000)to Toucan Corporation as a contribution to capital.In the current year and pursuant to a complete liquidation of Toucan,the property is distributed proportionately to the brothers.At the time of the distribution,the property had a fair market value of $40,000.What amount of loss will Toucan Corporation recognize on the distribution of the property?

A subsidiary is liquidated pursuant to § 332.The parent has held 100% of the stock in the subsidiary for the past ten years.The subsidiary has a net operating loss carryover of $400,000.The net operating loss does not carry over to the parent.

During the current year,Ecru Corporation is liquidated and distributes its only asset,land,to Kena,the sole shareholder.On the date of distribution,the land has a basis of $370,000,a fair market value of $550,000,and is subject to a liability of $450,000.Kena,who takes the land subject to the liability,has a basis of $50,000 in the Ecru stock.With respect to the distribution of the land,which of the following statements is correct?

Under what circumstances will preferred stock received in a nontaxable stock dividend not generate ordinary income,under § 306,upon its disposition?

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

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 $800,000)redeems 250 shares from Eleanor for $220,000 in a transaction that qualifies for sale or exchange treatment.With respect to the redemption,Eleanor will have a:

Explain the requirements for waiving the family attribution rules in the case of complete termination redemptions.

Steve has a capital loss carryover in the current year of $90,000.He owns 3,000 shares of stock in Carmine Corporation,which he purchased six years ago for $50 per share.In the current year,Carmine Corporation (E & P of $750,000)redeems all of his shares for $320,000.Steve is in the 35% tax bracket.What is his tax liability with respect to the corporate distribution if:

The adjusted gross estate of Keith,decedent,is $6 million.Included in the gross estate is stock in Gold Corporation (E & P of $750,000),a closely held corporation,valued at $2.4 million as of the date of Keith's death in 2012.Keith had acquired the stock twelve years ago at a cost of $420,000.Death taxes and funeral and administration expenses for Keith's estate are $1.2 million.Gold Corporation redeems one-half of the stock from Keith's estate in a § 303 redemption to pay death taxes using property with a fair market value of $1.2 million (adjusted basis of $950,000).Which of the following is a correct statement regarding the tax consequences of this redemption?

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

As of January 1 of the current year,Grouse Corporation has E & P of $600,000.Fumiko owns 320 shares of Grouse's common stock (basis of $45,000).On that date,Grouse Corporation declares and distributes a nontaxable preferred stock dividend,of which Fumiko receives 100 shares.Immediately after the stock dividend,the fair market value of one share of Grouse common stock is $500,and the fair market value of one share of Grouse preferred stock is $200.Two months later,Fumiko sells the 100 shares of preferred stock to an unrelated individual for $20,000.

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