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Exam 6: Corporations: Redemptions and Liquidations

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Question 61

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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 $100,000 and a fair market value of $270,000 on the date of the transfer. In the current year, Blue Corporation ( E & P $800,000) redeems 250 shares from Eleanor for $220,000 in a transaction that qualifies for sale or exchange treatment. With respect to the redemption, Eleanor will have a:

A) $195,000 capital gain.
B) $220,000 capital gain.
C) $195,000 dividend.
D) $220,000 dividend.
E) None of the above.

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

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Question 62

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A partial liquidation cannot result in sale or exchange treatment to a shareholder if it results in a pro rata stock redemption.

A) True
B) False

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Question 63

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Swan Corporation incurred $10,000 of accounting fees and $15,000 of legal fees in connection with the redemption of stock from its shareholders. None of the expenditures are deductible by Swan.

In the current year, Loon Corporation made a distribution in redemption of some of its shares. Loon incurred expenditures in connection with the redemption totaling $35,000 (accounting fees of $9,000, legal fees of $20,000, and brokerage fees of $6,000) . The distribution was a qualifying stock redemption. How much of the $35,000 is deductible in the current year?

A parent corporation must make the § 338 election by the fifteenth day of the third month following the close of the tax year in which a qualified stock purchase occurs.

On April 16, 2010, Blue Corporation purchased 15% of the Gold Corporation stock outstanding. Blue Corporation purchased an additional 50% of the stock in Gold on November 23, 2010, and an additional 20% on May 4, 2011. On September 23, 2011, Blue Corporation purchased the remaining 15% of Gold Corporation stock outstanding.

The stock of Tan Corporation (E & P of $1.3 million) is owned as follows: 90% by Egret Corporation (basis of $520,000), and 10% by Zoe (basis of $55,000). 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 $750,000) 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 $150,000) to Zoe. What are the tax consequences of these distributions to Egret, to Tan, and to Zoe?

After a plan of complete liquidation has been adopted, Condor Corporation sells its only asset, land (basis of $220,000) , to Eduardo (an unrelated party) for $300,000. Under the terms of the sale, Condor Corporation receives cash of $50,000 and Eduardo's notes for the balance of $250,000. The notes are payable over the next five years ($50,000 per year) and carry an appropriate interest rate. Immediately after the sale, Condor Corporation distributes the cash and notes to Maria, the sole shareholder of Condor Corporation. Maria has a basis of $30,000 in the Condor stock. The installment notes have a value equal to their face amount. If Maria wishes to defer as much gain as possible on the transaction, which of the following is correct?

Mary and Jane, unrelated taxpayers, own Gray Corporation's stock equally. One year before the complete liquidation of Gray, Mary transfers land (basis of $420,000, fair market value of $350,000) to Gray Corporation as a contribution to capital. Assume that Mary also contributed other property in the same transaction having a basis of $20,000 and fair market value of $95,000. In liquidation, Gray distributes the land to Jane. At the time of the liquidation, the land is worth $290,000.

Legal dissolution under state law is not required for a liquidation to be complete for tax purposes.

What are the tax consequences of a qualifying stock redemption to the distributing corporation?

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