Exam 6: Corporations: Redemptions and Liquidations

Explain the stock attribution rules that apply in the case of stock redemptions.

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

Puffin Corporation's 2,000 shares outstanding are owned as follows: Paul,800 shares;Sandra (Paul's sister),800 shares;and Greta (Paul's granddaughter),400 shares.During the current year,Puffin (E & P of $1 million)redeemed 600 shares of Paul's stock for $100,000.If Paul had acquired the 600 shares five years ago for $30,000,he will have a long-term capital gain of $70,000 from the redemption.

In a not essentially equivalent redemption [§ 302(b)(1)],the meaningful reduction test is an objective safe harbor rule that taxpayers can rely upon for sale or exchange treatment.

Tammy forms White Corporation in a transaction qualifying under § 351.In that transaction,Tammy transferred cash and equipment in exchange for White Corporation common (1,000 shares)and preferred (200 shares)stock.The preferred stock is § 306 stock for Tammy.

Corporate shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.

The adjusted gross estate of Debra,decedent,is $8 million.Debra's estate will incur death taxes and funeral and administration expenses of $1 million.Debra's gross estate includes stock in Silver Corporation that she had purchased twelve years ago for $600,000 (date of death fair market value of $3 million).At the time of her death in 2012,Debra owned 80% of the stock in Silver Corporation.Silver Corporation (E & P of $4 million)redeems all of the estate's stock in the corporation for $3 million.Debra's will names her daughter,Dena,who owns the remaining 20% interest in Silver Corporation,as her sole heir.With respect to this redemption,Debra's estate has the following income:

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:

Section 332 does not apply to a parent-subsidiary liquidation if the subsidiary corporation is insolvent on the date of the liquidation.

The sale of § 306 stock to a third party results in dividend income to the shareholder.

Sparrow Corporation purchased 90% of the stock of Warbler Corporation eight years ago for $1 million.In the current year,Sparrow liquidates Warbler and acquires assets with a basis to Warbler of $850,000 (fair market value of $1.2 million).Sparrow will have a basis in the assets of $850,000 (Warbler's basis in the assets),and a recognized loss of $150,000 ($1 million basis in Warbler stock - $850,000 carryover basis in assets).

Ivory Corporation (E & P of $650,000)has 1,000 shares of common stock outstanding owned by unrelated parties as follows: Veronica,500 shares,and Tommie,500 shares.Veronica and Tommie each paid $125 per share for the Ivory stock 12 years ago.In May of the current year,Ivory distributes securities held as an investment (basis of $140,000,fair market value of $250,000)to Veronica in redemption of 200 of her shares.