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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 41

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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) A) and B)
G) B) and D)

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Question 42

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Which one of the following statements is false?

A) Most countries that trade with the U.S.do not impose a double tax on dividends.
B) Tax proposals that include corporate integration would eliminate the double tax on dividends.
C) The double tax on dividends may make corporations more financially vulnerable during economic downturns.
D) Many of the arguments in support of the double tax on dividends relate to fairness.
E) None of the above.

F) C) and E)
G) B) and E)

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Question 43

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Steve has a capital loss carryover in the current year of $90,000. He owns 3,000 shares of stock in Carmine Corporation, which he purchased six years ago for $50 per share. In the current year, Carmine Corporation (E & P of $750,000) redeems all of his shares for $320,000. Steve is in the 35% tax bracket. What is his tax liability with respect to the corporate distribution if:

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

Ethel, Hannah, and Samuel, unrelated individuals, own the stock in Broadbill Corporation (E & P of $700,000) as follows: Ethel, 300 shares; Hannah, 300 shares; and Samuel, 400 shares. Broadbill redeems 200 of Samuel's shares (basis of $175,000) for $250,000. If Samuel's stock is a capital asset and has been held for over three years, Samuel has:

Tern Corporation, a cash basis taxpayer, has taxable income of $500,000 for the current year.Tern elected $100,000 of § 179 expense.It also had a related party loss of $20,000 and a realized (not recognized) gain from an involuntary conversion of $75,000.It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000.Tern's current E & P is:

For tax purposes, all stock redemptions are treated as dividend distributions.

Purple Corporation has accumulated E & P of $100,000 on January 1, 2012.In 2012, Purple has current E & P of $130,000 (before any distribution) .On December 31, 2012, the corporation distributes $250,000 to its sole shareholder, Cindy (an individual) .Purple Corporation's E & P as of January 1, 2013 is:

If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock, then either a zero basis or a portion of the old stock basis may be assigned to the rights, at the shareholder's option.

At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding, the corporation distributed $300,000 to redeem 400 shares of its stock.The transaction qualified as a disproportionate redemption for the shareholder.Blackbird's E & P is reduced by $280,000 as a result of the distribution.

Stephanie is the sole shareholder and president of Hawk Corporation.She feels that she can justify at least a $220,000 bonus this year because of her performance.However, rather than a bonus in the form of a salary, she plans to have Hawk pay her a $220,000 dividend.Because Stephanie's marginal tax rate is 35%, she prefers to receive a dividend taxed at 15%.Her accountant, however, suggests a $310,000 bonus in lieu of the $220,000 dividend since Hawk Corporation is in the 34% tax bracket.Should Stephanie take the $220,000 dividend or the $310,000 bonus? Support your answer by computing the after-tax cost of the two alternatives to Hawk and to Stephanie.

The rules used to determine the taxability of stock dividends also apply to distributions of stock rights.

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.

In a not essentially equivalent redemption [§ 302(b)(1)], the meaningful reduction test is an objective safe harbor rule that taxpayers can rely upon for sale or exchange treatment.

Orange Corporation has a deficit in accumulated E & P of $600,000 and has current E & P of $450,000.On July 1, Orange distributes $500,000 to its sole shareholder, Morris, who has a basis in his stock of $105,000.As a result of the distribution, Morris has:

A shareholder's holding period of property acquired in a stock redemption begins on the date of the distribution.

Six years ago, Ronald and his mom each owned 50% of the stock of Bronze Corporation. At such time, Bronze redeemed all of Ronald's stock. For the redemption year, Ronald filed the agreement required of the family attribution waiver and reported the transaction as a complete termination redemption (i.e., sale or exchange). In the current year, the mom passed away and willed her entire stock interest in Bronze to Ronald. The inheritance of Bronze stock by Ronald is a prohibited interest for purposes of the family attribution waiver.

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

Which of the following statements regarding constructive dividends is not correct?

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