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Exam 6: Corporations Redemptions and Liquidations

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Question 21

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Copper Corporation (E & P of $1.2 million) distributes land (basis of $410,000, fair market value of $650,000) to Lauren, a shareholder, to carry out a qualifying stock redemption. Lauren had a basis of $90,000 in the shares redeemed. Which of the following is an incorrect statement regarding the redemption?

A) If the land is distributed subject to a $500,000 liability, Copper Corporation will recognize a gain of $240,000.
B) If the land is distributed subject to a $500,000 liability, Lauren will have a basis in the land of $650,000.
C) If the land is distributed subject to a $500,000 liability, Lauren will recognize a gain of $60,000.
D) If the land is distributed subject to a $700,000 liability, Copper Corporation will recognize a gain of $290,000.
E) None of the above.

F) A) and C)
G) None of the above

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Question 22

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Seven years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer. In the current year, Blue Corporation (E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that qualifies for sale or exchange treatment. With respect to the redemption, Eleanor will have a:

A) $140,000 dividend.
B) $260,000 dividend.
C) $140,000 capital gain.
D) $260,000 capital gain.
E) None of the above.

F) A) and E)
G) None of the above

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Question 23

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One similarity between the tax treatment accorded liquidating and nonliquidating distributions is with respect to a shareholder's basis in property received in such distributions. For each type of distribution, the shareholder's basis is the property's fair market value on the date of distribution.

The stock in Rhea Corporation is owned by Jennifer (80%) and Lucy (20%) , mother and daughter. In a liquidation of the corporation in the current year, Rhea distributes land that it purchased two years ago for $675,000 to Lucy. The property has a fair market value on the date of distribution of $450,000. One year later, Lucy sells the land for $400,000. What loss, if any, will Rhea Corporation recognize with respect to the distribution of land?

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:

Six years ago, Ronald and his mom each owned 50% of the stock of Bronze Corporation. At such time, Bronze redeemed all of Ronald's stock. For the redemption year, Ronald filed the agreement required of the family attribution waiver and reported the transaction as a complete termination redemption (i.e., sale or exchange). In the current year, the mom passed away and willed her entire stock interest in Bronze to Ronald. The inheritance of Bronze stock by Ronald is a prohibited interest for purposes of the family attribution waiver.

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

At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding, the corporation distributed $300,000 to redeem 400 shares of its stock. The transaction qualified as a disproportionate redemption for the shareholder. Blackbird's E & P is reduced by $300,000 as a result of the distribution.

The related-party loss limitation in a complete liquidation applies only to distributions of property while the built-in loss limitation can apply to a distribution or sale of property.

Do noncorporate and corporate shareholders typically have the same preference for the tax treatment of a stock redemption? Explain.

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

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 $1.5 million) is owned as follows: 90% by Egret Corporation (basis of $900,000), and 10% by Zoe (basis of $70,000). 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 $1.3 million) 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 $260,000) to Zoe. What are the tax consequences of these distributions to Egret, to Tan, and to Zoe?

A redemption will qualify as a not essentially equivalent redemption only if the shareholder's interest in the redeeming corporation has been meaningfully reduced.

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.

Magenta Corporation acquired land in a § 351 exchange one year ago. The land had a basis of $320,000 and a fair market value of $350,000 on the date of the transfer. Magenta Corporation has two shareholders, Mark (70%) and Megan (30%) , who are brother and sister. Magenta Corporation adopts a plan of liquidation in the current year. On this date, the land has decreased in value to $250,000. Magenta Corporation sells the land for $250,000 and distributes the proceeds pro rata to Mark and Megan. What amount of loss may Magenta Corporation recognize on the sale of the land?

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:

Explain the requirements for the termination of a business test for purposes of a partial liquidation. Why is this test generally preferable over the genuine contraction of a corporate business test for qualifying a distribution as a partial liquidation?

Grackle Corporation (E & P of $600,000) distributes cash of $200,000 and land (fair market value of $400,000; basis of $250,000) to a shareholder in a qualifying stock redemption. The land distributed is subject to a mortgage of $460,000. Grackle will recognize a gain of $210,000 as a result of the distribution.

A subsidiary corporation is liquidated at a time when it is indebted to its parent corporation. The subsidiary corporation distributes property to the parent corporation in satisfaction of the indebtedness. If the liquidation is governed by § 332, neither the subsidiary nor the parent recognize gain or loss on the transfer of property in satisfaction of indebtedness.