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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 81

Multiple Choice

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Which of the following is a correct statement regarding a redemption to pay death taxes under § 303?

A) An estate recognizes gain on the redemption equal to the excess of the distribution proceeds over the decedent's basis in the stock.
B) The § 318 stock attribution rules do not apply to the redemption.
C) The value of the stock in the decedent's gross estate must exceed 40% of the value of the adjusted gross estate.
D) A corporation recognizes gains and losses on the distribution of property in the redemption.
E) None of these.

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

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Question 82

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Finch Corporation distributes property (basis of $225,000, fair market value of $300,000) to a shareholder in a distribution that is a qualifying stock redemption. The property is subject to a liability of $160,000, which the shareholder assumes. The basis of the property to the shareholder is:

A) $-0-.
B) $140,000.
C) $225,000.
D) $300,000.
E) None of these.

F) A) and E)
G) C) and E)

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Question 83

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The stock in Crimson Corporation is owned by Angel and Melawi, who are unrelated. Angel owns 60% and Melawi owns 40% of the stock. All of Crimson Corporation's assets were acquired by purchase. The following assets are to be distributed in complete liquidation of Crimson Corporation: Adjusted $\quad$ Fair Market Basis $\quad$$\quad$ Value $\begin{array} { l r r } \text { Cash } & \$ 300,000 & \$ 300,000 \\\text { Inventory } & 110,000 & 100,000 \\\text { Equipment } & 180,000 & 200,000 \\\text { Land } & 460,000 & 400,000\end{array}$ a. What gain or loss, if any, would Crimson Corporation recognize if it distributes the cash, inventory, and equipment to Angel and the land to Melawi? b. What gain or loss, if any, would Crimson Corporation recognize if it distributes the equipment and land to Angel and the cash and inventory to Melawi?

Tungsten Corporation, a calendar year cash basis taxpayer, made estimated tax payments of $800 each quarter in 2019, for a total of $3,200. Tungsten filed its 2019 tax return in 2020 and the return showed a tax liability $4,200. When it filed its tax return in 2020, Tungsten paid an additional $1,000 in Federal income taxes. How does the additional payment of $1,000 impact Tungsten's E & P?

Robin Corporation distributes furniture (basis of $40,000; fair market value of $50,000) as a property dividend to its shareholders. The furniture is subject to a liability of $55,000. Robin Corporation recognizes gain of:

Vireo Corporation redeemed shares from its sole shareholder pursuant to a written agreement between the parties that clearly identified the transaction as a stock redemption (not a dividend distribution). Since the agreement is binding under state law, the shareholder will receive sale or exchange treatment with respect to the redemption.

Provide a brief outline on computing current E & P.

Reginald and Roland (Reginald's son) each own 50% of the stock of Robin Corporation. Reginald's stock interest is entirely redeemed by Robin. Two years later, Reginald loans Robin $250,000. The loan to Robin Corporation does not constitute a prohibited interest for purposes of the family attribution waiver.

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?

Constructive dividends have no effect on a distributing corporation's E & P.

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 2019. -Dividends received deduction.

In a property distribution, the amount of dividend income recognized by a shareholder is always reduced by the amount of liability assumed by a shareholder.

If there is sufficient E & P, a distribution of nonconvertible preferred stock to common shareholders is taxable.

When is a redemption to pay death taxes under § 303 most advantageous?

The Code treats corporate distributions that are a return of a shareholder's investment as sales or exchanges and corporate distributions that are a return from a shareholder's investment as dividends.

To determine current E & P, taxable income must be increased for any dividends received deduction.

Raul's gross estate includes 1,500 shares of stock of Orange Corporation (basis to Raul of $1.2 million, fair market value on date of death of $8.2 million). The estate will incur $4.4 million of death taxes and funeral and administration expenses, and the adjusted gross estate is $22 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 $10 million) redeems all of the estate's 1,500 shares for $8.2 million. What are the tax consequences of the redemption to Raul's estate?

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 2019. -Interest received from municipal bonds in 2019.

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, and to Starling?

Dividends paid to shareholders who hold both long and short positions do not qualify for the reduced tax rate available to individuals in certain years.