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Exam 6: Corporations: Redemptions and Liquidations

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Question 21

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Skylark Corporation owns 90% of the outstanding stock of Quail Corporation,having purchased the stock five years ago for $550,000.Pursuant to a plan of liquidation adopted by Quail Corporation on March 4,2010,Quail distributes all its property on December 1,2010,to its shareholders.Quail Corporation had never been insolvent and had E & P of $830,000 on the date of liquidation.Pursuant to the liquidation,Quail distributed property worth $690,000 (basis $580,000) to Skylark Corporation.How much gain must the parties recognize in 2010 on the transfer of this property to Skylark Corporation?

A) $140,000 as to Skylark and $110,000 as to Quail.
B) $0 as to Skylark and $110,000 as to Quail.
C) $140,000 as to Skylark and $0 as to Quail.
D) $30,000 as to Skylark and $110,000 as to Quail.
E) None of the above.

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

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Question 22

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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.

A) True
B) False

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Question 23

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The stock in Lark Corporation is owned equally by Olaf and his son Pete.In a liquidation of the corporation,Lark Corporation distributes to Olaf land that it had purchased three years ago for $550,000.The property has a fair market value on the date of distribution of $400,000.Later,Olaf sells the land for $420,000.What loss will Lark Corporation recognize with respect to the distribution of the land?

Cardinal Corporation has 1,000 shares of common stock outstanding.John owns 400 of the shares,John's father owns 300 shares,John's daughter owns 200 shares,and Redbird Corporation owns 100 shares.John owns 70% of the stock in Redbird Corporation.How many shares is John deemed to own in Cardinal Corporation under the attribution rules of § 318?

The partial liquidation rules provide a unique opportunity for a corporation to contract its business enterprises in a manner that produces favorable tax results for its shareholders.Discuss the requirements for a partial liquidation and the resulting tax consequences to the shareholders.

Bluebird Corporation's 1,000 shares outstanding are owned as follows: Lucinda,350 shares;Carl (Lucinda's father),300 shares;and Nancy (Lucinda's sister),350 shares.During the current year,Bluebird (E & P of $800,000)redeemed 200 shares of Lucinda's stock for $50,000.If Lucinda had acquired the 200 shares five years ago for $10,000,she will have a long-term capital gain of $40,000 from the redemption.

Sam's gross estate includes stock in Tern Corporation and Wren Corporation,valued at $700,000 and $900,000,respectively.At the time of Sam's death in 2009,the stock represented 27% of Tern's outstanding stock and 38% of Wren's outstanding stock.Sam's adjusted gross estate equals $4,400,000.Death taxes and funeral and administration expenses for Sam's estate total $700,000.Sam had a basis of $120,000 in the Tern stock and $300,000 in the Wren stock at the time of his death.None of the beneficiaries of Sam's estate own (directly or indirectly)any stock in Wren Corporation,but some of the beneficiaries own stock of Tern Corporation.Consider the following independent questions.

All of the stock in Robin Corporation (E & P of $800,000)is held by three unrelated individuals as follows: Shontelle has 300 shares,Marta has 200 shares,and Diego owns 500 shares.Robin Corporation redeems 200 of Diego's shares (basis of $10,000)for $40,000.If Diego's stock is a capital asset that has been held for the requisite holding period,he has a long-term capital gain of $30,000.

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 $300,000 and a fair market value of $450,000 on the date of the transfer.In the current year,Blue Corporation (E & P of $600,000) redeems 200 shares from Eleanor for $190,000 in a transaction that does not qualify for sale or exchange treatment.With respect to the redemption,Eleanor will have a:

Hubert,the sole shareholder of Owl Corporation,receives a nontaxable stock dividend of 100 shares of preferred stock from Owl (E & P of $120,000) .As a result of the stock dividend,Hubert properly allocates $40,000 of his common stock basis to the preferred stock.Two years after the stock dividend,Hubert sells the preferred stock to Thomas,an unrelated party,for $150,000.Owl's E & P at the time of the sale is $300,000.With respect to the sale of the preferred stock:

Brown Corporation has 1,000 shares of common stock outstanding.Bob owns 200 of the shares,Bob's mother owns 200 shares,Bob's daughter owns 100 shares,and Bob's sister owns 150 shares.The remaining shares outstanding are owned by Black Corporation (150 shares)and Bluebird Partnership (200 shares).Bob owns 60% of the stock in Black Corporation.

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 2009,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:

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 E & P of $600,000 at the time of liquidation.The subsidiary's E & P disappears as a result of the liquidation.

Two years ago,Emily,the sole shareholder of Tan Corporation (E & P of $600,000) ,received a nontaxable stock dividend of 100 shares of preferred stock (fair market value of $100,000) from Tan.As a result of the stock dividend,Emily properly allocated $30,000 of her common stock basis to the preferred stock.One year ago,Emily made a gift of the preferred stock in Tan Corporation to her son,Matt.In the current year,Matt sells one-half of the shares of preferred stock to Betty,an unrelated party,for $50,000.With respect to the sale of the preferred stock by Matt:

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:

One similarity between the tax treatment accorded nonliquidating and liquidating distributions is with respect to the recognition of losses by the distributing corporation.As a general rule,a corporation recognizes losses on both nonliquidating and liquidating distributions of depreciated property (fair market value less than basis).

In the current year,Dove Corporation (E & P of $1 million) distributes all of its property in a complete liquidation.Alexandra,a shareholder,receives land having a fair market value of $300,000.Dove Corporation had purchased the land as an investment three years ago for $375,000,and the land was distributed subject to a $270,000 liability.Alexandra took the land subject to the $270,000 liability.What is Alexandra's basis in the land?

Section 332 will apply to a parent-subsidiary liquidation even if the subsidiary corporation is insolvent on the date of the liquidation.

Noncorporate shareholders generally prefer a nonqualified stock redemption over a qualifying stock redemption due to the availability of the dividends received deduction.

At a time when Blackbird Corporation had E & P of $950,000 and 1,000 shares of stock outstanding,the corporation distributed $250,000 to redeem 300 shares of its stock.The transaction qualified as a disproportionate redemption for the shareholder.Blackbird's E & P is reduced by $285,000 as a result of the distribution.