Exam 19: Corporations: Distributions Not in Complete Liquidation

Hazel,Emily,and Frank,unrelated individuals,own all of the stock in Wren Corporation (E & P of $900,000)as follows: Hazel,250 shares;Emily,250 shares;and Frank,1,000 shares.Wren redeems 400 of Frank's shares (basis of $40,000)for $200,000.With respect to the distribution in redemption of the stock:

Reginald and Roland (Reginald's son)each own 50% of the stock of Robin Corporation.Reginald's stock interest is entirely redeemed by Robin Corporation.Two years later,Reginald loans Robin Corporation $250,000.The loan to Robin Corporation constitutes a prohibited interest for purposes of the family attribution waiver.

In August,Sunglow Corporation declares a $4 dividend out of E & P on each share of common stock to shareholders of record on October 1.Elaine and Tom each purchase 100 shares of Sunglow stock on September 1.On September 15,Elaine also purchases a short position in Sunglow.Tom sells 50 of his shares on October 15 and continues to hold the remaining 50 shares through the end of the year.Elaine closes her short position in Sunglow on December 119- With respect to the dividends,which of the following is correct?

Glenda is the sole shareholder of Condor Corporation.She sold her stock to Melissa on October 31 for $150,000.Glenda's basis in Condor stock was $50,000 at the start of the year.Condor distributed land to Glenda immediately before the sale.Condor's basis in the land was $20,000 (fair market value of $25,000).On December 31,Melissa received a $75,000 cash distribution from Condor.During the year,Condor has $20,000 of current E & P and its accumulated E & P balance on January 1 is $10,000.Which of the following statements is true?

During the year,White Corporation distributes land to its sole shareholder.If the fair market value of the land is more than its adjusted basis,White will not recognize gain on the distribution.

All dividends received by individual shareholders are subject to either a 15% or a 0% tax rate.

Mulberry Corporation has an August 31 year-end.Mulberry had $50,000 in accumulated E & P at the beginning of its 2011 fiscal year (September 1,2010)and during the year,it incurred a $75,000 operating loss.It also distributed $65,000 to its sole shareholder,Charles,on November 30,2010.If Charles is a calendar year taxpayer,how should he treat the distribution when he files his 2010 income tax return (assuming the return is filed by April 15,2011)?

The gross estate of April,decedent,includes stock in Brown Corporation and Parrot Corporation valued at $700,000 and $1.3 million,respectively.April's adjusted gross estate is $5 million.At the time of her death in 2009,April owned 24% of the Brown stock and 40% of the Parrot stock.Immediate members of April's family own the remaining shares of both Brown and Parrot.Those individuals are also the sole beneficiaries of April's estate.Death taxes and funeral and administration expenses for April's estate are $700,000.April had a basis of $130,000 in the Brown stock and $290,000 in the Parrot stock.Brown Corporation (E & P of $900,000)distributed land worth $700,000 (basis of $650,000)to April's estate in redemption of all of the Brown stock.Which of the following is a correct statement regarding the tax consequences of this redemption?

Hawk Corporation has 300 shares of stock outstanding: Marina owns 60 shares,Kent owns 90 shares,and Tom owns 75 shares.Blackbird Partnership owns the remaining 75 shares of stock in Hawk Corporation.Marina,Kent,and Tom,all unrelated,are equal partners of Blackbird Partnership.With respect to the stock attribution rules under § 318:

If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock,then either a zero basis or a portion of the old stock basis may be assigned to the rights,at the shareholder's option.

Silver Corporation has accumulated E & P of $1,000,000 as of January 1 of the current year.During the year,it expects to have earnings from operations of $840,000 and to make a cash distribution of $450,000.Silver Corporation also expects to sell an asset for a loss of $1,000,000.Thus,it anticipates incurring a deficit of $160,000 for the year.What can Silver do to minimize the amount of dividend income to its shareholders?

Currently,Brown Corporation (E & P of $800,000)has 1,000 shares of common stock outstanding.Pat owns 300 shares.His wife owns 300 shares,his daughter owns 200 shares,and his father owns 200 shares.Two years ago,Pat transferred $50,000 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 $60,000,its fair market value.With respect to the distribution in redemption of the preferred stock:

Sally and her brother 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.

Regardless of any deficit in accumulated E & P,distributions during the year are treated as dividends to the extent of current E & P.

Domingo and Juan,brothers,each own 300 shares in White Corporation (E & P of $700,000).Heron Partnership owns the remaining 400 shares of stock in White Corporation,and Juan has a 25% interest in Heron Partnership.White Corporation redeems 200 shares of Juan's stock for $120,000.Juan paid $150 a share for the stock five years ago.With respect to the redemption:

Corporate distributions are presumed to be paid out of E & P and are treated as dividends unless the parties to the transaction can show otherwise.

In a redemption to pay death taxes,stock in corporations in which the decedent held a 20% or more interest is treated as stock in a single corporation for purposes of determining whether the value of stock owned by the decedent exceeds 35% of the value of the decedent's adjusted gross estate.

Beige Corporation (a calendar year taxpayer)has taxable income of $150,000,and its financial records reflect the following for the year. Beige Corporation's current E & P is:

On January 2,2010,Orange Corporation purchased equipment for $300,000 with an ADS recovery period of 10 years and a MACRS useful life of 7 years.Section 179 was not elected.MACRS depreciation properly claimed on the asset,including depreciation in the year of sale,totaled $79,6019- The equipment was sold on July 1,2011,for $290,000.As a result of the sale,the adjustment to taxable income needed to arrive at current E & P is:

Stacey and Andrew each own one-half of the stock in Parakeet Corporation,a calendar year taxpayer.Cash distributions from Parakeet are: $350,000 to Stacey on April 1 and $150,000 to Andrew on May 1.If Parakeet's current E & P is $60,000,how much is allocated to Andrew's distribution?