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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 21

True/False

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Distributions by a corporation to its shareholders are presumed to be a dividend unless the parties can prove otherwise.

A) True
B) False

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Question 22

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To carry out a qualifying stock redemption,Turaco Corporation (E & P of $800,000) transfers land held for investment purposes to Aida,a shareholder.The land had a basis of $250,000,a fair market value of $400,000,and is subject to a $300,000 liability.Aida has a basis of $70,000 in the shares redeemed.Which of the following is a correct statement regarding the tax consequences of this redemption?

A) Aida will have $400,000 of dividend income.
B) Aida will have a $100,000 basis in the land.
C) Turaco Corporation will recognize a gain of $50,000.
D) Aida will recognize a gain of $30,000.
E) None of the above.

F) A) and E)
G) A) and B)

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Question 23

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Which one of the following statements is false?

Property distributed by a corporation as a dividend is subject to a liability in excess of its basis.For purposes of determining gain on the distribution,the basis of the property is treated as being not less than the amount of liability.

Goldfinch Corporation distributes stock rights to its shareholders.How is the basis of the stock rights received by Goldfinch's shareholders determined?

Matching Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. a.Increase b.Decrease c.No effect -Gain on installment sale in 2017 deferred until 2018.

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

Raul's gross estate 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 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?

Maria and Christopher each own 50% of Cockatoo Corporation,a calendar year taxpayer.Distributions from Cockatoo are: $750,000 to Maria on April 1 and $250,000 to Christopher on May 1.Cockatoo's current E & P is $300,000 and its accumulated E & P is $600,000.How much of the accumulated E & P is allocated to Christopher's distribution?

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 does not constitute a prohibited interest for purposes of the family attribution waiver.

Matching Using the legend provided, classify each statement accordingly. In all cases, assume that taxable income is being adjusted to arrive at current E & P for 2017. a.Increase b.Decrease c.No effect -Cash dividends distributed to shareholders in 2017.

Kite Corporation,a calendar year taxpayer,has taxable income of $360,000 for 2018.Among its transactions for the year are the following: Disregarding any provision for Federal income taxes,determine Kite Corporation's current E & P for 2018.

Aaron and Michele,equal shareholders in Cavalier Corporation,receive $25,000 each in distributions on December 31 of the current year.During the current year,Cavalier sold an appreciated asset for $60,000 (basis of $15,000) .Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year,with interest payable at a rate of 6 percent.Before considering the effect of the asset sale,Cavalier's current year E & P is $40,000 and it has no accumulated E & P.How much of Aaron's distribution will be taxed as a dividend?

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:

Starling Corporation was organized fifteen years ago to construct office furniture.Eight years ago,Starling began a fast food business.In the current year,Starling discontinues its fast food business and sells all of the assets used in that business for $2 million.Further,Starling distributes the entire sales proceeds in a pro rata redemption of 250 shares of stock from each of its two equal shareholders-Morgan,an individual,and Magpie Corporation.Morgan has a basis of $100,000 in her redeemed stock,Magpie Corporation has a basis of $125,000 in its redeemed stock,and both shareholders have held their stock interest in Starling for several years.Starling Corporation has E & P of $4 million and 2,000 shares outstanding at the time of the distribution.What are the tax consequences of the stock redemption to Morgan,to Magpie Corporation,and to Starling Corporation?

Jen,the sole shareholder of Mahogany Corporation,sold her stock to Jason on July 1 for $90,000.Jen's stock basis at the beginning of the year was $60,000.Mahogany made a $30,000 cash distribution to Jen immediately before the sale,while Jason received a $60,000 cash distribution from Mahogany on November 1.As of the beginning of the current year,Mahogany had $16,000 in accumulated E & P,while current E & P (before distributions) is $30,000.What are the tax consequences of these transactions to Jen and Jason?

No E & P adjustment is required for regular tax gains under the installment method.

At the beginning of the current year,Doug and Alfred each own 50% of Amaryllis Corporation (a calendar year taxpayer) .In July,Doug sold his stock to Kevin for $140,000.At the beginning of the year,Amaryllis Corporation had accumulated E & P of $240,000 and its current E & P is $280,000 (prior to any distributions) .Amaryllis distributed $300,000 on February 15 ($150,000 to Doug and $150,000 to Alfred) and distributed another $300,000 on November 1 ($150,000 to Kevin and $150,000 to Alfred) .Kevin has dividend income of:

When does a redemption qualify as a not essentially equivalent redemption under § 302(b)(1)?

The adjusted gross estate of Keith,decedent,is $12 million.Included in the gross estate is stock in Gold Corporation (E & P of $1.3 million) ,a closely held corporation,valued at $4.6 million as of the date of Keith's death.Keith had acquired the stock twelve years ago at a cost of $900,000.Death taxes and funeral and administration expenses for Keith's estate are $2.3 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 $2.3 million (adjusted basis of $1.9 million) .Which of the following is a correct statement regarding the tax consequences of this redemption?