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Exam 4: Corporate Nonliquidating Distributions

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Question 51

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Identify which of the following statements is true.

A) Only stock included in the decedent's gross estate can be redeemed under the Sec.303 provisions.
B) If the stock redemption proceeds are used to pay either the estate's funeral and administrative expenses or death taxes,the redemption can qualify for capital gains treatment under Sec.303.
C) Usually,a stock redemption qualifying under Sec.303 as a redemption to pay death taxes will result in little or no gain to the redeeming shareholder.
D) All of the above are true.

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Question 52

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Identify which of the following increases Earnings & Profits.

A) a capital contribution
B) life insurance proceeds payable to the spouse
C) tax-exempt interest income
D) All of the above increase E&P of a corporation.

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Question 53

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Blast Corporation manufactures purses and make-up kits.The corporation decides to quit manufacturing purses and distributes the assets associated with this division to its shareholders.The distribution of the these assets will be treated as a partial liquidation if

Van owns all 1,000 shares of Valley Metal Corporation stock.The stock has a $100,000 FMV.Karen wants to purchase the stock from Van but has only $70,000.Valley Metal has ample cash,which is not needed for operations.Which of the following best qualifies for bootstrap redemption treatment and no constructive dividends to the purchaser?

White Corporation is a calendar-year taxpayer.Wilhelmina owns all of its stock.Her basis for the stock is $25,000.On March 1 of the current year (not a leap year),White Corporation distributes $60,000 to Wilhelmina.Determine the tax consequences of the cash distribution to Wilhelmina in each of the following independent situations: a)Current E&P $15,000,accumulated E&P $50,000. b)Current E&P $25,000,accumulated E&P $(25,000). c)Current E&P ($36,500),accumulated E&P $65,000. d)Current E&P ($10,000),accumulated E&P $(25,000.

Wills Corporation,which has accumulated a current E&P totaling $70,000,distributes land to its sole shareholder,an individual.The land has an FMV of $75,000 and an adjusted basis of $60,000.The shareholder assumes a $15,000 liability associated with the land.The transaction will have the following tax consequences.

Peter owns all 100 shares of Parker Corporation's stock.His basis in the stock is $30,000.Parker Corporation has $300,000 of E&P.Parker Corporation redeems 25 of Peter's shares for $90,000.What are the consequences to Peter and to Parker Corporation?

Corporations recognize gains and losses on the distribution of property to shareholders if the property's fair market value differs from its basis.

Rich owns 60 of the 100 outstanding shares of Rainbow Corporation's stock and 80 of the 100 outstanding shares of Oz Corporation's stock.Rich's basis in his Rainbow shares is $12,000,and his basis in his Oz shares is $8,000.Rich sells 30 of his Rainbow shares to Oz Corporation for $50,000.At the end of the year of the sale,Rainbow and Oz Corporations have E&Ps of $25,000 and $40,000,respectively. a)What is the amount and character of Rich's gain or loss? b)What is Rich's basis in his remaining shares of the Rainbow and Oz stock? c)How does the sale affect the E&Ps of Rainbow and Oz Corporations? d)What basis does Oz Corporation take in the Rainbow shares it purchases? e)How would your answer to part (a)change if Rich owns only 50 shares of the 100 outstanding shares of Oz Stock?

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

Ameriparent Corporation owns a 70% interest in Flag Corporation.The corporations have current and accumulated E&Ps of $25,000 and $40,000,respectively.Taxpayer,who has a $20,000 basis in her 40% ownership interest of Ameriparent Corporation,sells sufficient stock to Flag to reduce her interest in Ameriparent from 40% to 20%.Taxpayer receives $20,000 for the stock she surrenders.What are the tax consequences of the transaction for Taxpayer?

Exit Corporation has accumulated E&P of $24,000 at the beginning of the current tax year.Current E&P is $20,000.During the year,the corporation makes the following distributions to its sole shareholder who has a $22,000 basis for her stock. $\begin{array} { | l | r | } \hline \text { Date } & \text { Amount Distributed } \\\hline \text { April 1 } & \$ 20,000 \\\hline \text { Iune 1 } & 20,000 \\\hline \text { August 1 } & 15,000 \\\hline \text { November 1 } & 5,000 \\\hline\end{array}$ The treatment of the $15,000 August 1 distribution would be

Which of the following requirements must be met for a redemption to be treated as substantially disproportionate?

Hogg Corporation distributes $30,000 to its sole shareholder,Ima.At the time of the distribution,Hogg's E&P is $14,000 and Ima's basis in her stock is $10,000.Ima's gain from this transaction is a

Dixie Corporation distributes $31,000 to its sole shareholder,Sally.At the time of the distribution,Dixie's E&P is $25,000 and Sally's basis in her Dixie stock is $10,000.Sally's basis in her Dixie stock after the distribution is

Identify which of the following statements is true.

What is a stock redemption? What are some of the reasons for making a stock redemption? Why are some redemptions treated as sales and others as dividends?

Jerry purchased land from Winter Harbor Corporation,his 100%-owned corporation,for $275,000.The corporation purchased the land three years ago for $300,000.Similar tracts of land located nearby have sold for $400,000 in recent months.What tax issues should be considered with respect to the corporation's sale of the land?

In the current year,Pearl Corporation has $300,000 of current and accumulated E&P.On June 3,Pearl Corporation distributes a parcel of land (a capital asset)worth $120,000 to Betty,a shareholder.The land has a $60,000 adjusted basis to Pearl Corporation and is subject to a $16,000 mortgage,which Betty assumes.Assume a 34% marginal corporate tax rate. a)What is the amount and character of the income recognized by Betty as a result of the distribution? b)What is Betty's basis for the land? c)What is the amount and character of Pearl's gain or loss as a result of the distribution? d)What effect does the distribution have on Pearl's E&P?

Strong Corporation is owned by a group of 20 shareholders.During the current year,Strong Corporation pays $225,000 in salary and bonuses to Stedman,its president and controlling shareholder.The IRS audits Strong's tax return and determines that reasonable compensation for Stedman would be $125,000.Strong Corporation agrees to the adjustment. a)What effect does the disallowance of part of the deduction for Stedman's salary and bonuses have on Strong Corporation and Stedman? b)What tax savings could have been obtained by Strong Corporation and Stedman if an agreement had been in effect that required Stedman to repay Strong Corporation any amounts determined by the IRS to be unreasonable?