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Exam 6: Corporations: Redemptions and Liquidations

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Question 31

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Hannah, Greta, and Winston own the stock in Redpoll Corporation (E & P of $900,000) as follows: Hannah, 600 shares; Greta, 400 shares; and Winston, 1,000 shares. Greta is Hannah's daughter, and Winston is Hannah's brother. Redpoll Corporation redeems 400 of Hannah's shares (basis of $55,000) for $240,000. Hannah purchased the stock three years ago as an investment. With respect to the stock redemption, Hannah has:

A) Dividend income of $185,000.
B) Dividend income of $240,000.
C) Long-term capital gain of $185,000.
D) Long-term capital gain of $240,000.
E) None of the above.

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

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Question 32

Multiple Choice

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Kingbird Corporation (E & P of $800,000) has 1,000 shares of stock outstanding. That stock is held by Amata (550 shares) and Esteban (450 shares) , who are unrelated individuals. Kingbird redeems 200 of Amata's shares for $1,000 per share. Amata paid $300 per share for her Kingbird stock nine years ago. Which of the following statements is correct with respect to the stock redemption?

A) Amata has dividend income of $200,000.
B) Amata has a long-term capital gain of $140,000.
C) Amata's basis in her remaining 350 shares is $60,000.
D) Kingbird reduces its E & P by $200,000.
E) None of the above.

F) A) and B)
G) None of the above

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Question 33

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Betty's adjusted gross estate is $7 million. The death taxes and funeral and administration expenses of her estate total $800,000. Included in Betty's gross estate is stock in Heron Corporation, valued at $2.1 million as of the date of her death in 2011. Betty had acquired the stock six years ago at a cost of $410,000. If Heron Corporation redeems $800,000 of Heron stock from the estate, the transaction will qualify under § 303 as a redemption to pay death taxes and receive sale or exchange treatment.

One advantage of acquiring a corporation via an asset purchase instead of a stock purchase is that an asset purchase avoids the transfer of the acquired corporation's liabilities.

If a liquidation qualifies under § 332, any minority shareholder will recognize gain (but not loss) equal to the difference between the fair market value of assets received and the basis of the shareholder's stock.

In the current year, Donovan sells to an unrelated individual 500 shares of preferred stock in Flamingo Corporation for $15,000. Donovan received the preferred stock in a nontaxable stock dividend four years ago from Flamingo (E & P of $700,000). At that time, the preferred stock had a fair market value of $45,000, and $20,000 of common stock basis was properly allocated to the preferred stock. Donovan will recognize a $5,000 loss as a result of the sale of the preferred stock.

Indigo has a basis of $1 million in the stock of Owl Corporation, a subsidiary in which it owns 100% of all classes of stock. Indigo purchased the stock in Owl 10 years ago. In the current year, Indigo liquidates Owl and acquires assets worth $1.2 million. At the time of its liquidation, Owl Corporation had a basis of $800,000 in the assets and E & P of $500,000. Which of the following statements is correct with respect to the liquidation?

Three years ago, Loon Corporation purchased 100% of the stock of Pelican Corporation for $950,000. Currently, Pelican Corporation has assets with a basis of $1.1 million and a fair market value of $1.3 million. If Loon liquidates Pelican, what basis will Loon have in the assets it acquires from Pelican Corporation?

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

Ivory Corporation (E & P of $650,000) has 1,000 shares of common stock outstanding owned by unrelated parties as follows: Veronica, 500 shares, and Tommie, 500 shares. Veronica and Tommie each paid $125 per share for the Ivory stock 12 years ago. In May of the current year, Ivory distributes securities held as an investment (basis of $140,000, fair market value of $250,000) to Veronica in redemption of 200 of her shares.

The stock in Camel Corporation is owned by Albert and Tomoko, who are unrelated. Albert owns 30% and Tomoko owns 70% of the stock in Camel Corporation. All of Camel Corporation's assets were acquired by purchase. The following assets are to be distributed in complete liquidation of Camel Corporation:

To qualify a partial liquidation under the termination of a business test, the distribution must consist of the proceeds from the sale of a qualified trade or business.

Shareholders may defer gain, to the point of collection, on a liquidating distribution of installment notes obtained by the corporation in the sale of its assets.

One difference 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 liquidating distributions of depreciated property (fair market value less than basis) but not on nonliquidating distributions of such property.

Which of the following is an incorrect statement regarding the application of the § 318 stock attribution rules?

Hawk Corporation has 2,000 shares of stock outstanding: Marina owns 700 shares, Russell owns 600 shares, Velvet Partnership owns 300 shares, and Yellow Corporation owns 400 shares. Marina and Russell, unrelated individuals, are equal partners of Velvet Partnership. Marina owns 25% of the stock in Yellow Corporation.

Joe owns 100% of Green Corporation (E & P of $500,000) and 100% of Navy Corporation (E & P of $400,000) . Joe sells 100 shares in Green (basis of $40,000) to Navy for $70,000, its fair market value. Joe purchased the stock in Green six years ago. Joe has:

Which of the following statements is correct with respect to the § 338 election?

For purposes of the § 338 election, a corporation must acquire, in a taxable transaction, at least 80% of the stock (voting power and value) of another corporation within an 12-month period.

Explain the requirements for waiving the family attribution rules in the case of complete termination redemptions.