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Exam 6: Corporations: Redemptions and Liquidations

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Question 21

True/False

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For purposes of a partial liquidation, the termination of a business test is a subjective test that should be relied upon only after obtaining a favorable ruling from the IRS.

A) True
B) False

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Question 22

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During the current year, Goldfinch Corporation purchased 100% of the stock of Dove Corporation and made a qualified election under § 338. Which of the following statements is incorrect with respect to the § 338 election?

A) Dove is treated as a new corporation as of the day following the qualified stock purchase date.
B) Dove must be liquidated pursuant to the § 338 election.
C) Dove is treated as having sold its assets on the qualified stock purchase date.
D) Dove can recognize gain or loss as a result of the § 338 election.
E) None of these.

F) All of the above
G) C) and E)

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Question 23

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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.

The related-party loss limitation applies to distributions to related parties and either the distribution is pro rata or the property distributed is disqualified property.

The adjusted gross estate of Keith, decedent, is $24 million. Included in the gross estate is stock in Gold Corporation E & P of $2.6 million) , a closely held corporation, valued at $9.2 million as of the date of Keith's death. Keith had acquired the stock 12 years ago at a cost of $1.8 million. Death taxes and funeral and administration expenses for Keith's estate are $4.6 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 $4.6 million adjusted basis of $3.8 million) . Which of the following is a correct statement regarding the tax consequences of this redemption?

Penguin Corporation E & P of $500,000) distributes land fair market value of $150,000; basis of $160,000) to an estate in a redemption to pay death taxes under § 303. Penguin Corporation recognizes a $10,000 loss as a result of the distribution.

Steve has a capital loss carryover of $30,000 in the current year. He owns 3,000 shares of stock in Carmine Corporation, which he purchased six years ago for $20 per share. In the current year, Carmine Corporation E & P of $750,000) redeems all of his shares for $140,000. Steve is in the 32% tax bracket. What is his income tax liability with respect to the corporate distribution if: a. The redemption qualifies for sale or exchange treatment, and Steve has no other transactions in the current year involving capital assets? b. The redemption does not qualify for sale or exchange treatment, and Steve has no other transactions in the current year involving capital assets.?

Hawk Corporation has 2,000 shares of stock outstanding: Marina owns 800 shares, Russell owns 500 shares, Velvet Partnership owns 400 shares, and Yellow Corporation owns 300 shares. Marina and Russell, unrelated individuals, are equal partners of Velvet. Marina owns 35% of the stock in Yellow. a. Applying the § 318 stock attribution rules, determine how many shares in Hawk Corporation each shareholder owns, directly and indirectly: Marina Russell Velvet Partnership Yellow Corporation b. Assume, instead, that Marina owns 60% of Yellow Corporation. How many shares does Marina own, directly and indirectly, in Hawk Corporation?

In the current year, Quail Corporation distributed installment notes payable in redemption of some of its shares. Quail incurred the following expenditures in connection with the redemption: accounting fees of $7,000 and legal fees of $8,000. In addition, Quail paid $10,000 of interest expense on the installment notes payable. The distribution was a qualifying stock redemption. How much of the $25,000 is deductible in the current year?

A subsidiary is liquidated pursuant to § 332. The parent has held 100% of the stock in the subsidiary for the past 10 years. The subsidiary has a net operating loss carryover of $400,000. The net operating loss does not carry over to the parent.

Coffee Corporation has 2,000 shares of common stock outstanding. John owns 700 of the shares, John's grandfather owns 100 shares, John's father owns 100 shares, John's ex-wife owns 700 shares, and Redbird Partnership owns 400 shares. John is a 50% partner in Redbird Partnership. How many shares is he deemed to own in Coffee Corporation under the § 318 attribution rules?

Pursuant to a liquidation, Coral Corporation distributes to Lucinda, a shareholder, land basis of $90,000, fair market value of $200,000). The land is subject to a $75,000 liability. Lucinda will have a basis of $125,000 in the land.

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?

Purple Corporation has two equal shareholders, Joshua and Ellie, who are father and daughter. One year ago, the two shareholders transferred properties to Purple in a § 351 exchange. Joshua transferred land basis of $600,000, fair market value of $450,000) and securities basis of $70,000, fair market value of $250,000) , and Ellie transferred equipment basis of $420,000, fair market value of $700,000) . In the current year, Purple Corporation adopts a plan of liquidation, sells all of its assets, and distributes the proceeds pro rata to Joshua and Ellie. The only loss realized upon disposition of the properties was with respect to the land that had decreased in value to $310,000 and was sold for this amount. Purple never used the land for any business purpose during the time it was owned by the corporation. What amount of loss can Purple Corporation recognize on the sale of the land?

Puffin Corporation's 2,000 shares outstanding are owned as follows: Paul, 800 shares; Sandra Paul's sister), 800 shares; and Greta Paul's granddaughter), 400 shares. During the current year, Puffin E & P of $1 million) redeemed 600 shares of Paul's stock for $100,000. If Paul acquired the 600 shares five years ago for $30,000, he will have a long-term capital gain of $70,000 from the redemption.

Pursuant to a complete liquidation, Rust Corporation distributes to its shareholders land with a basis of $150,000 and a fair market value of $400,000. The land is subject to a liability of $300,000. What is Rust's recognized gain on the distribution?

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 $200,000. Dove Corporation had purchased the land as an investment three years ago for $125,000, and the land was distributed subject to a $100,000 liability. Alexandra took the land subject to the $100,000 liability. What is her basis in the land?

As a general rule, a liquidating corporation recognizes gains but not losses on the distribution of property in complete liquidation.

If a parent corporation makes a § 338 election, the subsidiary corporation is treated as a new corporation as of the day following the qualified stock purchase date.

For purposes of the waiver of the family attribution rules in a complete termination redemption, the former shareholder must notify the IRS within 30 days of acquiring a prohibited interest in the corporation during the 10-year period following the redemption.