Test bank for south western federal taxation 2012 corporations partnerships estates and trusts 35th

Test Bank for South Western Federal Taxation 2012 Corporations Partnerships Estates and Trus

Test Bank for South Western Federal Taxation 2012 Corporations Partnerships Estates and Trusts, 35th Edition: Hoffman To download the complete and accurate content document, go to: https://testbankbell.com/download/test-bank-for-south-western-federal-taxation-2012corporations-partnerships-estates-and-trusts-35th-edition-hoffman/

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CHAPTER 6--CORPORATIONS: REDEMPTIONS AND LIQUIDATIONS copy 1.

The Code treats corporate distributions that are a return of a shareholder’s investment as sales or exchanges and corporate distributions that are a return from a shareholder’s investment as dividends.

True

2.

In general, if a shareholder’s ownership interest is not diminished as a result of a stock redemption, the Code will treat the transaction as a sale or exchange.

True

3.

False

Vireo Corporation redeemed shares from its sole shareholder pursuant to a written agreement between the parties that clearly identified the transaction as a stock redemption (and not a dividend distribution). Since the agreement is binding under state law, the shareholder will receive sale or exchange treatment with respect to the redemption.

True

7.

False

A shareholder’s basis in property acquired in a stock redemption is the property’s fair market value as of the date of redemption.

True

6.

False

Yolanda owns 60% of the outstanding stock of Amber Corporation. In a qualifying stock redemption, Amber distributes $20,000 to Yolanda in exchange for one-half of her shares (basis of $35,000). As a result of the redemption, Yolanda has a recognized capital loss of $15,000.

True

5.

False

Corporate shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.

True

4.

False

False

In applying the § 318 stock attribution rules to a stock redemption, a shareholder is treated as owning the stock of her spouse, children, grandchildren, parents, and siblings.

True

False

8.

A redemption will qualify as a not essentially equivalent redemption only if the shareholder’s interest in the redeeming corporation has been meaningfully reduced.

True

9.

False

As a result of a redemption, a shareholder’s interest (direct and indirect) in the corporation decreased from 80% to 55%. The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

True

False

10. 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 had acquired the 600 shares five years ago for $30,000, he will have a long-term capital gain of $70,000 from the redemption.

True

False

11. 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.

True

False

12. Reginald and Roland (Reginald’s son) each own 50% of the stock of Robin Corporation. Reginald’s stock interest is entirely redeemed by Robin Corporation. Two years later, Reginald loans Robin Corporation $250,000. The loan to Robin Corporation does not constitute a prohibited interest for purposes of the family attribution waiver.

True

False

13. 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.

True

False

14. For purposes of a partial liquidation, a distribution is not essentially equivalent to a dividend if it results in a genuine contraction of the business of the corporation.

True

False

15. 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. True

False

16. To qualify a partial liquidation under the termination of a business test, the distribution must consist of the assets of a qualified trade or business.

True

False

17. In determining whether a distribution qualifies as a § 303 redemption to pay death taxes, the stock attribution rules must be applied.

True

False

18. Betty’s adjusted gross estate is $9 million. The death taxes and funeral and administration expenses of her estate total $1.2 million. Included in Betty’s gross estate is stock in Heron Corporation, valued at $3.3 million as of the date of her death in 2013. Betty had acquired the stock six years ago at a cost of $810,000. If Heron Corporation redeems $1.2 million 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.

True

False

19. At the time of her death, Janice owned (in terms of the value of the stock outstanding) the following stock: 18% of Heron Corporation and 21% of Hawk Corporation. The value of these stocks is included in Janice’s gross estate. For purposes of applying the 35% of the value of adjusted gross estate requirement under § 303 (i.e., redemption to pay death taxes), the Heron and Hawk stocks are aggregated.

True

False

20. Grackle Corporation (E & P of $600,000) distributes cash of $200,000 and land (fair market value of $400,000; basis of $250,000) to a shareholder in a qualifying stock redemption. The land distributed is subject to a mortgage of $460,000. Grackle will recognize a gain of $210,000 as a result of the distribution.

True

False

21. 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 $300,000 as a result of the distribution.

True

False

22. Tan Corporation paid interest expense on a debt incurred in financing a redemption of its stock. The interest expense is not deductible since it was incurred in connection with a stock redemption.

True

False

23. In a redemption of § 306 stock, the redemption proceeds constitute dividend income to the extent of the corporation’s E & P on the date of the redemption.

True

False

24. Tammy forms White Corporation in a transaction qualifying under § 351. In that transaction, Tammy transferred cash and equipment in exchange for White Corporation common (1,000 shares) and preferred (200 shares) stock. The preferred stock is not § 306 stock for Tammy.

True

False

25. Three years ago, Darlene received preferred (§ 306) stock pursuant to a nontaxable stock dividend from Grackle Corporation. In the current year, Darlene gives the Grackle preferred stock to her sister, Nancy. The Grackle preferred stock is § 306 stock with regards to Nancy.

True

False

26. For purposes of the application of § 304 (redemptions through the use of related corporations), a shareholder must own (directly or indirectly) at least 50% of the stock of two more corporations.

True

False

27. Abel owns all the stock of both Beige Corporation and Brown Corporation. Both corporations have significant amounts of E & P. Abel sells some of his stock in Beige to Brown Corporation. Abel will not have dividend income as a result of the sale of Beige stock.

True

False

28. Legal dissolution under state law is required for a liquidation to be complete for tax purposes.

True

False

29. One similarity between the tax treatment accorded liquidating and nonliquidating distributions is with respect to a shareholder’s basis in property received in such distributions. For each type of distribution, the shareholder’s basis is the property’s fair market value on the date of distribution.

True

False

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

True

False

31. Liquidation expenses incurred by a corporation are generally deductible as § 162 trade or business expenses.

True

False

32. 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.

True

False

33. The built-in loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property’s fair market value after its transfer to the corporation.

True

False

34. 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.

True

False

35. 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.

True

False

36. A corporation generally will recognize gain or loss on a liquidating distribution of installment notes to its shareholders.

True

False

37. Section 332 can apply to a parent-subsidiary liquidation even if the subsidiary corporation is insolvent on the date of the liquidation.

True

False

38. If a liquidation qualifies under § 332, any minority shareholder will recognize gain or loss equal to the difference between the fair market value of assets received and the basis of the shareholder’s stock.

True

False

39. A subsidiary corporation is liquidated at a time when it is indebted to its parent corporation. The subsidiary corporation distributes property to the parent corporation in satisfaction of the indebtedness. If the liquidation is governed by § 332, neither the subsidiary nor the parent recognize gain or loss on the transfer of property in satisfaction of indebtedness.

True

False

40. Brown Corporation purchased 85% of the stock of Green Corporation five years ago for $850,000. In the current year, Brown Corporation liquidates Green Corporation and acquires assets with a basis to Green Corporation of $700,000 (fair market value of $1.1 million). Brown Corporation will have a basis in the assets of $850,000, the same as Brown’s basis in its Green stock.

True

False

41. Sparrow Corporation purchased 90% of the stock of Warbler Corporation eight years ago for $1 million. In the current year, Sparrow liquidates Warbler and acquires assets with a basis to Warbler of $850,000 (fair market value of $1.2 million). Sparrow will have a basis in the assets of $850,000 (Warbler’s basis in the assets), and no recognized gain or loss.

True

False

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

True

False

43. 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.

True

False

44. If a parent corporation makes a § 338 election, the subsidiary corporation recognizes gain but not loss on the deemed sale of its assets on the qualified stock purchase date.

True

False

45. If a parent corporation makes a § 338 election, the subsidiary corporation must be liquidated.

True

False

46. 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.

True

False

47. Seven years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer. In the current year, Blue Corporation (E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that does not qualify for sale or exchange treatment. With respect to the redemption, Eleanor will have a:

A. $140,000 dividend.

B. $260,000 dividend.

C. $140,000 capital gain.

D. $260,000 capital gain.

E. None of the above.

48. Seven years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer. In the current year, Blue Corporation ( E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that qualifies for sale or exchange treatment. With respect to the redemption, Eleanor will have a:

A. $140,000 dividend.

B. $260,000 dividend.

C. $140,000 capital gain.

D. $260,000 capital gain.

E. None of the above.

49. Finch Corporation distributes property (basis of $225,000, fair market value of $300,000) to a shareholder in a distribution that is a qualifying stock redemption. The property is subject to a liability of $160,000, which the shareholder assumes. The basis of the property to the shareholder is:

A. $0.

B. $140,000.

C. $225,000.

D. $300,000.

E. None of the above.

50. 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 John deemed to own in Coffee Corporation under the § 318 attribution rules?

A. 700.

B. 1,000.

C. 1,100.

D. 1,700.

E. None of the above.

51. Kite Corporation has 1,000 shares of stock outstanding. Kent owns 300 shares, Kent’s father owns 200 shares, Kent’s daughter owns 100 shares, and Kent’s aunt owns 200 shares. Plover Corporation owns the other 200 shares in Kite Corporation. Kent owns 75% of the stock in Plover Corporation. Applying the § 318 stock attribution rules, how many shares does Kent own in Kite Corporation?

A. 500.

B. 600.

C. 750.

D. 950.

E. None of the above.

52. Keshia owns 200 shares in Parakeet Corporation. Keshia has a 30% beneficiary interest in her deceased grandmother’s estate. The estate owns 400 shares in Parakeet Corporation. None of the other beneficiaries of the estate own stock in Parakeet. In applying the § 318 attribution rules:

A. The estate owns 400 shares.

B. Keshia owns 320 shares.

C. Keshia owns 600 shares.

D. The estate owns 460 shares.

E. None of the above.

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

A. An individual is not deemed to own the shares owned by his or her siblings.

B. Stock owned by an estate is deemed to be owned in full by a beneficiary.

C. Stock owned by any shareholder owning 50% or more of a corporation’s stock is deemed to be owned in full by the corporation.

D. Stock owned by a partnership is deemed to be owned proportionately by a partner.

E. None of the above.

54. Bristlebird Corporation (E & P of $700,000) has 3,000 shares of common stock outstanding. Juan owns 1,500 shares and his wife, Roberta, owns 1,500 shares. Juan and Roberta each have a basis of $90,000 in their Bristlebird stock. In the current year, Bristlebird Corporation redeems 1,000 shares from Juan for $250,000. With respect to the distribution in redemption of the Bristlebird stock:

A. Juan has dividend income of $250,000.

B. Juan has dividend income of $190,000.

C. Juan has a capital gain of $250,000.

D. Juan has a capital gain of $190,000.

E. None of the above.

55. Hazel, Emily, and Frank, unrelated individuals, own all of the stock in Wren Corporation (E & P of $1.2 million) as follows: Hazel, 1,500 shares; Emily, 300 shares; and Frank, 200 shares. Wren redeems 900 of Hazel’s shares (basis of $210,000) for $625,000. With respect to the distribution in redemption of the stock:

A. Hazel has a capital gain of $415,000.

B. Hazel has a capital gain of $625,000.

C. Hazel has dividend income of $415,000.

D. Hazel has dividend income of $625,000.

E. None of the above.

56. Lucinda owns 1,100 shares of Blackbird Corporation stock at a time when Blackbird has 2,000 shares of stock outstanding. The remaining shareholders are unrelated to Lucinda. What is the minimum number of shares Blackbird must redeem from Lucinda so that the transaction will qualify as a disproportionate redemption?

A. 220.

B. 393.

C. 484.

D. 880.

E. None of the above.

57. 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. Long-term capital gain of $185,000.

B. Long-term capital gain of $240,000.

C. Dividend income of $185,000.

D. Dividend income of $240,000.

E. None of the above.

58. 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:

A. A long-term capital gain of $75,000.

B. A short-term capital gain of $75,000.

C. Ordinary income of $250,000.

D. Ordinary income of $75,000.

E. None of the above.

59. Julian, Berta, and Maria own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation (E & P of $750,000). Berta is Julian’s sister, and Maria is Julian’s aunt. Caramel Corporation redeems all of Julian’s stock for $420,000. Julian paid $200 a share for the stock five years ago. Julian continued to serve on Caramel’s board of directors after the redemption. With respect to the redemption:

A. Dividend income of $340,000.

B. Dividend income of $420,000.

C. Long-term capital gain of $340,000.

D. Long-term capital gain of $420,000.

E. None of the above.

60. Lupe and Rodrigo, father and son, each own 50% of the stock outstanding of Heron Corporation (E & P of $400,000). During the current year, Heron redeems all of Lupe’s shares for $250,000. The transaction cannot qualify as a complete termination redemption if:

A. Lupe received a $250,000 note receivable from Heron in the stock redemption.

B. Lupe loaned Heron Corporation $50,000 two years following the redemption.

C. Rodrigo continued to serve on Heron Corporation’s board of directors for two years following the redemption.

D. Three years after the redemption, Lupe inherited Rodrigo’s shares in Heron as a result of his son’s death.

E. None of the above.

61. Leon owns 750 shares of the 2,000 outstanding shares of Crane Corporation (E & P of $900,000). None of the other shareholders of Crane are related to Leon. Leon acquired his Crane shares ten years ago for $80,000. Crane has operated several trades or businesses for more than five years. In the current year, Crane sells the assets of one of those trades or businesses and distributes the proceeds from the asset sale to the shareholders in a pro rata stock redemption. In this transaction, Leon receives $250,000 in redemption of 300 shares of Crane. As a result of this transaction, Leon will recognize:

A. $218,000 dividend income.

B. $250,000 dividend income.

C. $218,000 long-term capital gain.

D. $250,000 long-term capital gain.

E. None of the above.

62. Which of the following statements is correct with respect to a partial liquidation?

A. The genuine contraction of a corporate business requirement is an objective test that taxpayers can rely upon with certainty.

B. The distribution of proceeds from the sale of excess inventory to shareholders in exchange for part of their stock will not satisfy the not essentially equivalent to a dividend test.

C. A stock redemption pursuant to a partial liquidation cannot be pro rata with respect to the shareholders.

D. The termination of a business test requires that the distributing corporation actively conducted at least three trades or businesses for at least five years.

E. None of the above.

63. The gross estate of John, decedent, includes stock in Crimson Corporation and Jade Corporation valued at $1.3 million and $2 million, respectively. John’s adjusted gross estate is $9 million. He owned 23% of the Crimson stock and 31% of the Jade stock. Immediate members of John’s family own the remaining shares of both Crimson and Jade. Those individuals are also the sole beneficiaries of John’s estate. Death taxes and funeral and administration expenses for John’s estate are $1.3 million. John had a basis of $475,000 in the Crimson stock and $510,000 in the Jade stock. Crimson Corporation (E & P of $3 million) distributed land worth $1.3 million (basis of $800,000) to John’s estate in redemption of all of the Crimson stock. Which of the following is a correct statement regarding the tax consequences of this redemption?

A. The estate recognizes dividend income of $1.3 million on the redemption.

B. Crimson Corporation recognizes no gain on the distribution of the land.

C. The estate recognizes no gain or loss on the redemption.

D. The estate has a basis of $800,000 in the land.

E. None of the above.

64. The adjusted gross estate of Keith, decedent, is $12 million. Included in the gross estate is stock in Gold Corporation (E & P of $1.3 million), a closely held corporation, valued at $4.6 million as of the date of Keith’s death in 2013. Keith had acquired the stock twelve years ago at a cost of $900,000. Death taxes and funeral and administration expenses for Keith’s estate are $2.3 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 $2.3 million (adjusted basis of $1.9 million). Which of the following is a correct statement regarding the tax consequences of this redemption?

A. The estate will have a basis of $2.3 million in the property received from Gold Corporation in redemption of the estate’s stock.

B. Gold Corporation will not reduce its E & P as a result of the distribution of the property to Keith’s estate.

C. The estate will recognize a $1.4 million long-term capital gain on the redemption.

D. Gold Corporation recognizes no gain (or loss) on the distribution of the property to Keith’s estate.

E. None of the above.

65. The adjusted gross estate of Debra, decedent, is $8 million. Debra’s estate will incur death taxes and funeral and administration expenses of $1 million. Debra’s gross estate includes stock in Silver Corporation that she had purchased twelve years ago for $600,000 (date of death fair market value of $3 million). At the time of her death in 2013, Debra owned 80% of the stock in Silver Corporation. Silver Corporation (E & P of $4 million) redeems all of the estate’s stock in the corporation for $3 million.

Debra’s will names her daughter, Dena, who owns the remaining 20% interest in Silver Corporation, as her sole heir. With respect to this redemption, Debra’s estate has the following income:

A. $0.

B. $2.4 million long-term capital gain.

C. $2 million dividend.

D. $3 million dividend.

E. None of the above.

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

A. An estate recognizes gain on the redemption equal to the excess of the distribution proceeds over the decedent’s basis in the stock.

B. The § 318 stock attribution rules do not apply to the redemption.

C. The value of the stock in the decedent’s gross estate must exceed 40% of the value of the adjusted gross estate.

D. A corporation recognizes gains and losses on the distribution of property in the redemption.

E. None of the above.

67. Copper Corporation (E & P of $1.2 million) distributes land (basis of $410,000, fair market value of $650,000) to Lauren, a shareholder, to carry out a qualifying stock redemption. Lauren had a basis of $90,000 in the shares redeemed. Which of the following is an incorrect statement regarding the redemption?

A. If the land is distributed subject to a $500,000 liability, Copper Corporation will recognize a gain of $240,000.

B. If the land is distributed subject to a $500,000 liability, Lauren will have a basis in the land of $650,000.

C. If the land is distributed subject to a $500,000 liability, Lauren will recognize a gain of $60,000.

D. If the land is distributed subject to a $700,000 liability, Copper Corporation will recognize a gain of $290,000.

E. None of the above.

68. To carry out a qualifying stock redemption, Turaco Corporation (E & P of $800,000) transfers land held for investment purposes to Aida, a shareholder. The land had a basis of $250,000, a fair market value of $400,000, and is subject to a $300,000 liability. Aida has a basis of $70,000 in the shares redeemed. Which of the following is a correct statement regarding the tax consequences of this redemption?

A. Aida will have $400,000 of dividend income.

B. Aida will have a $100,000 basis in the land.

C. Turaco Corporation will recognize a gain of $50,000.

D. Aida will recognize a gain of $30,000.

E. None of the above.

69. Canary Corporation has 5,000 shares of stock outstanding. It redeems in a qualifying stock redemption 1,200 shares for $475,000 at a time when it has paid-in capital of $300,000 and E & P of $1.5 million.

What would be the charge to Canary’s E & P as a result of the redemption?

A. $72,000.

B. $300,000.

C. $432,000.

D. $475,000.

E. None of the above.

70. 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. $0.

B. $7,000.

C. $10,000.

D. $25,000.

E. None of the above.

71. Which of the following is an incorrect statement regarding the tax consequences of a § 306 stock disposition?

A. In a sale of § 306 stock, the shareholder generally recognizes ordinary income equal to the fair market value of the preferred stock on the date it was acquired in the stock dividend.

B. No loss is recognized on a sale of § 306 stock.

C. The issuing corporation’s E & P is not reduced by a sale of § 306 stock.

D. In a redemption of § 306 stock, the shareholder generally recognizes dividend income equal to the amount of the redemption proceeds.

E. None of the above.

72. Connie sold 400 shares of § 306 stock (basis of $20,000) in Blackbird Corporation to Larry (an unrelated individual) for $50,000. When the § 306 stock was issued to Connie, the stock had a value of $50,000, and Blackbird had E & P of $500,000. At the time the § 306 stock is sold, Blackbird’s E & P is $550,000. At the time of the sale, Connie owned 900 shares of common stock (basis of $210,000) in Blackbird. With respect to the sale of the § 306 stock by Connie:

A. Connie has $50,000 of ordinary income.

B. Blackbird Corporation reduces its E & P by $50,000.

C. Connie has a $30,000 capital gain.

D. After the sale, Connie has a $210,000 basis in the common stock.

E. None of the above.

73. Rodolfo makes a gift of § 306 stock (basis of $75,000, fair market value of $100,000) in Kiwi Corporation to his daughter, Josie. When the stock was issued to Rodolfo, his share of Kiwi Corporation’s E & P was $80,000. When its E & P is $200,000, Kiwi Corporation redeems all of Josie’s stock for $100,000. With respect to the stock redemption:

A. Josie will recognize a capital gain of $25,000.

B. The redemption does not reduce Kiwi Corporation’s E & P. C. Josie will recognize dividend income of $80,000.

D. Josie will recognize dividend income of $100,000.

E. None of the above.

74. 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:

A. Dividend income of $70,000.

B. A long-term capital gain of $70,000.

C. Dividend income of $30,000.

D. A long-term capital gain of $30,000.

E. None of the above.

75. In comparing a qualifying stock redemption with a complete liquidation, which of the following statements is incorrect?

A. Liquidations and qualifying stock redemptions parallel each other in terms of the effect that E & P has on the nature of the gain or loss recognized by the shareholder.

B. The basis of property acquired is its fair market value on the date of distribution for both a qualifying stock redemption and a liquidation.

C. Both a qualifying stock redemption and a complete liquidation produce sale or exchange treatment to the shareholder.

D. A corporation will recognize gain upon the distribution of appreciated property for both a qualifying stock redemption and a complete liquidation, but a corporation will recognize loss upon a distribution of depreciated property only for a liquidating distribution.

E. Section 267 disallows recognition of losses between related parties in a complete liquidation but not in a qualifying stock redemption.

76. Pursuant to a complete liquidation, Lilac Corporation distributes the following assets to its unrelated shareholders: land held for three years as an investment (basis of $300,000, fair market value of $600,000), inventory (basis of $100,000, fair market value of $80,000), and marketable securities held for four years as an investment (basis of $200,000, fair market value of $240,000). What are the tax consequences to Lilac Corporation as a result of the liquidation?

A. Lilac Corporation would recognize no gain or loss on the liquidation.

B. Lilac Corporation would recognize a net capital gain of $320,000.

C. Lilac Corporation would recognize a net capital gain of $340,000 and an ordinary loss of $20,000.

D. Lilac Corporation would recognize a net capital gain of $340,000.

E. None of the above.

77. Pursuant to a complete liquidation, Oriole Corporation distributes to its shareholders land with a basis of $350,000 and a fair market value of $800,000. The land is subject to a liability of $920,000. What is Oriole’s recognized gain or loss on the distribution?

A. $0.

B. $120,000 loss.

C. $450,000 gain.

D. $570,000 gain.

E. None of the above.

78. The stock in Rhea Corporation is owned by Jennifer (80%) and Lucy (20%), mother and daughter. In a liquidation of the corporation in the current year, Rhea distributes land that it purchased in 2010 for $675,000 to Lucy. The property has a fair market value on the date of distribution of $450,000. One year later, Lucy sells the land for $400,000. What loss, if any, will Rhea Corporation recognize with respect to the distribution of land?

A. $0.

B. $45,000.

C. $225,000.

D. $275,000.

E. None of the above.

79. The stock in Toucan Corporation is held equally by two brothers. Four years ago, the shareholders transfer property (basis of $200,000, fair market value of $220,000) to Toucan Corporation as a contribution to capital. In the current year and pursuant to a complete liquidation of Toucan, the property is distributed proportionately to the brothers. At the time of the distribution, the property had a fair market value of $40,000. What amount of loss will Toucan Corporation recognize on the distribution of the property?

A. $0.

B. $20,000.

C. $160,000.

D. $180,000.

E. None of the above.

80. 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?

A. $0.

B. $21,000.

C. $30,000.

D. $70,000.

E. None of the above.

81. 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), while 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 undeveloped 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?

A. $0.

B. $140,000.

C. $150,000.

D. $290,000.

E. None of the above.

82. On April 6, 2012, Crow Corporation acquired land in a transaction that qualified under § 351. The land had a basis of $400,000 to the contributing shareholder and a fair market value of $310,000. Assume that the shareholder also transferred equipment (basis of $100,000, fair market value of $200,000) in the same § 351 exchange. Crow Corporation adopted a plan of liquidation on October 3, 2013. On December 6, 2013, Crow Corporation distributes the land to Ali, a shareholder who owns 20% of the stock in Crow Corporation. The land’s fair market value was $230,000 on the date of the distribution to Ali. Crow Corporation acquired the land to use as security for a loan it had hoped to obtain from a local bank. In negotiating with the bank for a loan, the bank required the additional capital investment as a condition of its making a loan to Crow Corporation. How much loss can Crow Corporation recognize on the distribution of the land?

A. $0.

B. $80,000.

C. $90,000.

D. $170,000.

E. None of the above.

83. During the current year, Ecru Corporation is liquidated and distributes its only asset, land, to Kena, the sole shareholder. On the date of distribution, the land has a basis of $250,000, a fair market value of $650,000, and is subject to a liability of $500,000. Kena, who takes the land subject to the liability, has a basis of $120,000 in the Ecru stock. With respect to the distribution of the land, which of the following statements is correct?

A. Kena recognizes a gain of $530,000.

B. Ecru Corporation recognizes a gain of $250,000.

C. Kena recognizes a gain of $30,000.

D. Kena has a basis of $250,000 in the land.

E. None of the above.

84. 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 Alexandra’s basis in the land?

A. $0.

B. $100,000.

C. $125,000.

D. $200,000.

E. None of the above.

85. 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?

A. Condor Corporation recognizes no gain or loss on the distribution of the installment notes.

B. Maria recognizes a gain of $20,000 in the year of liquidation.

C. Maria recognizes a gain of $45,000 in the year of liquidation.

D. Maria recognizes a gain of $270,000 in the year of liquidation.

E. None of the above.

86. 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?

A. Owl recognizes a gain of $400,000.

B. Indigo has an $800,000 basis in the assets.

C. Owl’s E & P of $500,000 is eliminated.

D. Indigo recognizes a gain of $200,000.

E. None of the above.

87. The stock of Lavender Corporation is held as follows: 80% by Jade Corporation (basis of $400,000) and 20% by Tiffany (basis of $100,000). Lavender Corporation is liquidated in December of the current year, pursuant to a plan adopted earlier in the year. Pursuant to the liquidation, Lavender Corporation distributed Asset A (basis of $600,000, fair market value of $900,000) to Jade, and Asset B (basis of $250,000, fair market value of $225,000) to Tiffany. No election is made under § 338. With respect to the liquidation of Lavender:

A. Lavender recognizes a loss of $25,000 on the distribution of Asset B. B. Jade has a basis in Asset A of $900,000.

C. Tiffany has a basis in Asset B of $225,000.

D. Jade recognizes a gain of $500,000.

E. Lavender recognizes a gain of $300,000 on the distribution of Asset A. 88. Penguin Corporation purchased bonds (basis of $190,000) of its 100% owned subsidiary, Finch Corporation, at a discount. Pursuant to a § 332 liquidation and in satisfaction of the indebtedness, Finch distributes land worth $200,000 (basis of $160,000) to Penguin. Which of the following statements is correct with respect to the distribution of land?

A. Neither Finch nor Penguin recognize gain (or loss).

B. Finch recognizes no gain and Penguin recognizes a gain of $10,000.

C. Finch recognizes a gain of $40,000 and Penguin recognizes no gain.

D. Finch recognizes a gain of $40,000 and Penguin recognizes a gain of $10,000.

E. None of the above.

89. The stock of Penguin Corporation is held as follows: 85% by Duck Corporation and 15% by Gerald, an individual. Penguin Corporation is liquidated in December of the current year, pursuant to a plan adopted earlier in the year. Penguin Corporation distributes land with a basis of $350,000 and fair market value of $390,000 to Gerald in liquidation of his stock interest. Gerald had a basis of $200,000 in his Penguin stock. How much gain will Penguin Corporation recognize in this liquidating distribution?

A. $0.

B. $40,000.

C. $190,000.

D. $390,000.

E. None of the above.

90. Scarlet Corporation, the parent corporation, has a basis of $600,000 in the stock of Brown Corporation, a subsidiary in which it owns 90% of all classes of stock. Scarlet purchased the stock in Brown Corporation 10 years ago. In the current year, Scarlet Corporation liquidates Brown Corporation and acquires assets worth $800,000 and with a tax basis to Brown Corporation of $950,000. What basis will Scarlet Corporation have in the assets acquired from Brown Corporation?

A. $0.

B. $600,000.

C. $800,000.

D. $950,000.

E. None of the above.

91. 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 Corporation 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 the above.

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

A. The subsidiary corporation makes the § 338 election.

B. A qualified stock purchase occurs when a corporation acquires, in a taxable transaction, at least 80% of the stock (voting power and value) of another corporation within a 18-month period.

C. The parent recognizes no gain (loss) as a result of the election.

D. Gain, but not loss, is recognized by the subsidiary as a result of a deemed sale of its assets.

E. None of the above.

93. Tanya is in the 33% tax bracket. She acquired 1,000 shares of stock in Swan Corporation seven years ago for $100 a share. In the current year, Swan Corporation (E & P of $1.2 million) redeems all of her shares for $160,000. What are the income tax consequences to Tanya if:

a.

The redemption qualifies for sale or exchange treatment, and Tanya has no other transactions in the current year involving capital assets?

b.

The redemption does not qualify for sale or exchange treatment?

94. Steve has a capital loss carryover in the current year of $30,000. 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 33% 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?

95. 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 Partnership. Marina owns 35% of the stock in Yellow Corporation.

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?

96. Starling Corporation was organized fifteen years ago to construct office furniture. Eight years ago, Starling began a fast food business. In the current year, Starling discontinues its fast food business and sells all of the assets used in that business for $2 million. Further, Starling distributes the entire sales proceeds in a pro rata redemption of 250 shares of stock from each of its two equal shareholders— Morgan, an individual, and Magpie Corporation (i.e., 500 shares in total redeemed). Morgan has a basis of $100,000 in her redeemed stock, Magpie Corporation has a basis of $125,000 in its redeemed stock, and both shareholders have held their stock interest in Starling for several years. Starling Corporation has E & P of $4 million and 2,000 shares outstanding at the time of the distribution. What are the tax consequences of the stock redemption to Morgan, to Magpie Corporation, and to Starling Corporation?

97. Sam’s gross estate includes stock in Tern Corporation and Wren Corporation, valued at $1.4 million and $980,000, respectively. At the time of Sam’s death in 2013, the stock represented 22% of Tern’s outstanding stock and 27% of Wren’s outstanding stock. Sam’s adjusted gross estate equals $6,500,000. Death taxes and funeral and administration expenses for Sam’s estate total $980,000. Sam had a basis of $350,000 in the Tern stock and $190,000 in the Wren stock at the time of his death.

None of the beneficiaries of Sam’s estate own (directly or indirectly) any stock in Tern Corporation, but some of the beneficiaries own stock of Wren Corporation. Consider the following independent questions.

a.

What are the tax consequences to the estate if all of its Wren stock is redeemed by Wren Corporation for $980,000?

b.

What are the tax consequences to the estate if all of its Tern stock is redeemed by Tern Corporation for $1.4 million?

98. Raul’s gross estate includes 1,500 shares of stock of Orange Corporation (basis to Raul of $600,000, fair market value on date of death of $4.1 million). The estate will incur $2.2 million of death taxes and funeral and administration expenses, and the adjusted gross estate is $9 million. Denise, Raul’s daughter and sole heir of his estate, owns the remaining 500 shares of Orange Corporation’s (2,000) shares outstanding. In the current year, Orange (E & P of $5 million) redeems all of the estate’s 1,500 shares for $4.1 million. What are the tax consequences of the redemption to Raul’s estate?

99. Ivory Corporation (E & P of $1 million) has 2,000 shares of common stock outstanding owned by unrelated parties as follows: Veronica, 1,000 shares, and Tommie, 1,000 shares. Veronica and Tommie each paid $150 per share for the Ivory stock 12 years ago. In May of the current year, Ivory distributes land held as an investment (basis of $180,000, fair market value of $390,000) to Veronica in redemption of 350 of her shares.

a.

What are the tax results to Veronica on the redemption of her Ivory stock?

b.

What are the tax results to Ivory Corporation on the distribution of the land?

100. As of January 1 of the current year, Grouse Corporation has E & P of $600,000. Fumiko owns 320 shares of Grouse’s common stock (basis of $45,000). On that date, Grouse Corporation declares and distributes a nontaxable preferred stock dividend, of which Fumiko receives 100 shares. Immediately after the stock dividend, the fair market value of one share of Grouse common stock is $500, and the fair market value of one share of Grouse preferred stock is $200. Two months later, Fumiko sells the 100 shares of preferred stock to an unrelated individual for $20,000.

a.

Assuming Fumiko is in the 33% tax bracket, what are his income tax consequences resulting from the sale of the preferred stock?

b.

What is the effect on Grouse Corporation’s E & P as a result of the sale of the preferred stock?

101. The stock in Crimson Corporation is owned by Angel and Melawi, who are unrelated. Angel owns 60% and Melawi owns 40% of the stock. All of Crimson Corporation’s assets were acquired by purchase.

The following assets are to be distributed in complete liquidation of Crimson Corporation:

Cash Inventory Equipment Land

Adjusted Basis $300,000 110,000 180,000 460,000

Fair Market Value $300,000 100,000 200,000 400,000

a.

What gain or loss, if any, would Crimson Corporation recognize if it distributes the cash, inventory, and equipment to Angel and the land to Melawi?

b.

What gain or loss, if any, would Crimson Corporation recognize if it distributes the equipment and land to Angel and the cash and inventory to Melawi?

102. Mary and Jane, unrelated taxpayers, own Gray Corporation’s stock equally. One year before the complete liquidation of Gray, Mary transfers land (basis of $200,000, fair market value of $130,000) 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 $100,000. In liquidation, Gray distributes the land to Jane. At the time of the liquidation, the land is worth $110,000.

a.

How much loss, if any, may Gray Corporation recognize on the distribution of the land to Jane?

b.

Assume that the transfer of land to Gray Corporation was made so that the corporation could subdivide the land and build residential housing. However, a subsequent deterioration of the housing market forced Gray Corporation to abandon its plans. What amount of loss may Gray Corporation recognize on the distribution of the land to Jane?

103. After a complete liquidation has been adopted, Wren Corporation sells its only asset, unimproved land (basis of $200,000) held as an investment. The land is sold to Seth (an unrelated party) for $500,000.

Under the terms of the sale, Wren Corporation receives cash of $50,000 and Seth’s notes for the balance of $450,000. The notes are payable over the succeeding 5 years ($90,000 per year) and carry an appropriate rate of interest. Immediately after the sale, Wren Corporation distributes the cash and notes to Adam, the sole shareholder of Wren. Adam has an adjusted basis of $80,000 in the Wren stock. The installment notes have a value equal to their face amount of $450,000.

a.

How will Wren Corporation be taxed on the distribution?

b.

How will Adam be taxed on his receipt of the cash and notes?

104. The stock of Tan Corporation (E & P of $1.5 million) is owned as follows: 90% by Egret Corporation (basis of $900,000), and 10% by Zoe (basis of $70,000). 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 $1.3 million) 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 $260,000) to Zoe. What are the tax consequences of these distributions to Egret, to Tan, and to Zoe?

105. On March 16, 2012, Blue Corporation purchased 10% of the Gold Corporation stock outstanding. Blue Corporation purchased an additional 40% of the stock in Gold on October 24, 2012, and an additional 25% on April 4, 2013. On July 23, 2013, Blue Corporation purchased the remaining 25% of Gold Corporation stock outstanding.

a.

For purposes of the § 338 election, on what date does a qualified stock purchase occur?

b.

What is the due date for making the § 338 election?

106. Do noncorporate and corporate shareholders typically have the same preference for the tax treatment of a stock redemption? Explain.

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

108. When does a redemption qualify as a not essentially equivalent redemption under § 302(b)(1)?

109. What are the requirements that must be satisfied for a distribution to qualify under § 302(b)(2) as a disproportionate redemption?

110. Explain the requirements for the termination of a business test for purposes of a partial liquidation. Why is this test generally preferable over the genuine contraction of a corporate business test for qualifying a distribution as a partial liquidation?

111. When is a redemption to pay death taxes under § 303 most advantageous?

112. Under what circumstances will preferred stock received in a nontaxable stock dividend not generate ordinary income, under § 306, upon its disposition?

113. Explain why the antistuffing rules were enacted to limit the deductibility of losses realized by a corporation upon liquidation.

114. What are the tax consequences of a § 332 liquidation to the parent corporation, subsidiary corporation, and minority shareholder?

115. Compare the sale of a corporation’s assets with a sale of its stock from the perspective of the seller.

CHAPTER 6--CORPORATIONS: REDEMPTIONS AND LIQUIDATIONS copy Key 1.

The Code treats corporate distributions that are a return of a shareholder’s investment as sales or exchanges and corporate distributions that are a return from a shareholder’s investment as dividends.

TRUE

2.

In general, if a shareholder’s ownership interest is not diminished as a result of a stock redemption, the Code will treat the transaction as a sale or exchange.

FALSE

3.

Corporate shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.

TRUE

4.

Yolanda owns 60% of the outstanding stock of Amber Corporation. In a qualifying stock redemption, Amber distributes $20,000 to Yolanda in exchange for one-half of her shares (basis of $35,000). As a result of the redemption, Yolanda has a recognized capital loss of $15,000.

FALSE

5.

A shareholder’s basis in property acquired in a stock redemption is the property’s fair market value as of the date of redemption.

TRUE

6.

Vireo Corporation redeemed shares from its sole shareholder pursuant to a written agreement between the parties that clearly identified the transaction as a stock redemption (and not a dividend distribution). Since the agreement is binding under state law, the shareholder will receive sale or exchange treatment with respect to the redemption.

FALSE

7.

In applying the § 318 stock attribution rules to a stock redemption, a shareholder is treated as owning the stock of her spouse, children, grandchildren, parents, and siblings.

FALSE

8.

A redemption will qualify as a not essentially equivalent redemption only if the shareholder’s interest in the redeeming corporation has been meaningfully reduced.

TRUE

9.

As a result of a redemption, a shareholder’s interest (direct and indirect) in the corporation decreased from 80% to 55%. The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

FALSE

10.

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 had acquired the 600 shares five years ago for $30,000, he will have a long-term capital gain of $70,000 from the redemption.

TRUE

11.

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.

TRUE

12.

Reginald and Roland (Reginald’s son) each own 50% of the stock of Robin Corporation. Reginald’s stock interest is entirely redeemed by Robin Corporation. Two years later, Reginald loans Robin Corporation $250,000. The loan to Robin Corporation does not constitute a prohibited interest for purposes of the family attribution waiver.

TRUE

13.

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.

FALSE

14.

For purposes of a partial liquidation, a distribution is not essentially equivalent to a dividend if it results in a genuine contraction of the business of the corporation.

TRUE

15.

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. FALSE

16.

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

FALSE

17.

In determining whether a distribution qualifies as a § 303 redemption to pay death taxes, the stock attribution rules must be applied.

FALSE

18.

Betty’s adjusted gross estate is $9 million. The death taxes and funeral and administration expenses of her estate total $1.2 million. Included in Betty’s gross estate is stock in Heron Corporation, valued at $3.3 million as of the date of her death in 2013. Betty had acquired the stock six years ago at a cost of $810,000. If Heron Corporation redeems $1.2 million 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.

TRUE

19.

At the time of her death, Janice owned (in terms of the value of the stock outstanding) the following stock: 18% of Heron Corporation and 21% of Hawk Corporation. The value of these stocks is included in Janice’s gross estate. For purposes of applying the 35% of the value of adjusted gross estate requirement under § 303 (i.e., redemption to pay death taxes), the Heron and Hawk stocks are aggregated.

FALSE

20.

Grackle Corporation (E & P of $600,000) distributes cash of $200,000 and land (fair market value of $400,000; basis of $250,000) to a shareholder in a qualifying stock redemption. The land distributed is subject to a mortgage of $460,000. Grackle will recognize a gain of $210,000 as a result of the distribution.

TRUE

21.

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 $300,000 as a result of the distribution.

FALSE

22.

Tan Corporation paid interest expense on a debt incurred in financing a redemption of its stock. The interest expense is not deductible since it was incurred in connection with a stock redemption.

FALSE

23.

In a redemption of § 306 stock, the redemption proceeds constitute dividend income to the extent of the corporation’s E & P on the date of the redemption.

TRUE

24.

Tammy forms White Corporation in a transaction qualifying under § 351. In that transaction, Tammy transferred cash and equipment in exchange for White Corporation common (1,000 shares) and preferred (200 shares) stock. The preferred stock is not § 306 stock for Tammy.

TRUE

25.

Three years ago, Darlene received preferred (§ 306) stock pursuant to a nontaxable stock dividend from Grackle Corporation. In the current year, Darlene gives the Grackle preferred stock to her sister, Nancy. The Grackle preferred stock is § 306 stock with regards to Nancy.

TRUE

26.

For purposes of the application of § 304 (redemptions through the use of related corporations), a shareholder must own (directly or indirectly) at least 50% of the stock of two more corporations.

TRUE

27.

Abel owns all the stock of both Beige Corporation and Brown Corporation. Both corporations have significant amounts of E & P. Abel sells some of his stock in Beige to Brown Corporation. Abel will not have dividend income as a result of the sale of Beige stock.

FALSE

28.

Legal dissolution under state law is required for a liquidation to be complete for tax purposes.

FALSE

29.

One similarity between the tax treatment accorded liquidating and nonliquidating distributions is with respect to a shareholder’s basis in property received in such distributions. For each type of distribution, the shareholder’s basis is the property’s fair market value on the date of distribution.

TRUE

30.

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

FALSE

31.

Liquidation expenses incurred by a corporation are generally deductible as § 162 trade or business expenses.

TRUE

32.

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.

FALSE

33.

The built-in loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property’s fair market value after its transfer to the corporation.

TRUE

34.

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.

TRUE

35.

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.

FALSE

36.

A corporation generally will recognize gain or loss on a liquidating distribution of installment notes to its shareholders.

TRUE

37.

Section 332 can apply to a parent-subsidiary liquidation even if the subsidiary corporation is insolvent on the date of the liquidation.

FALSE

38.

If a liquidation qualifies under § 332, any minority shareholder will recognize gain or loss equal to the difference between the fair market value of assets received and the basis of the shareholder’s stock.

TRUE

39.

A subsidiary corporation is liquidated at a time when it is indebted to its parent corporation. The subsidiary corporation distributes property to the parent corporation in satisfaction of the indebtedness. If the liquidation is governed by § 332, neither the subsidiary nor the parent recognize gain or loss on the transfer of property in satisfaction of indebtedness.

FALSE

40.

Brown Corporation purchased 85% of the stock of Green Corporation five years ago for $850,000. In the current year, Brown Corporation liquidates Green Corporation and acquires assets with a basis to Green Corporation of $700,000 (fair market value of $1.1 million). Brown Corporation will have a basis in the assets of $850,000, the same as Brown’s basis in its Green stock.

FALSE

41.

Sparrow Corporation purchased 90% of the stock of Warbler Corporation eight years ago for $1 million. In the current year, Sparrow liquidates Warbler and acquires assets with a basis to Warbler of $850,000 (fair market value of $1.2 million). Sparrow will have a basis in the assets of $850,000 (Warbler’s basis in the assets), and no recognized gain or loss.

TRUE

42.

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

FALSE

43.

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.

TRUE

44.

If a parent corporation makes a § 338 election, the subsidiary corporation recognizes gain but not loss on the deemed sale of its assets on the qualified stock purchase date.

FALSE

45.

If a parent corporation makes a § 338 election, the subsidiary corporation must be liquidated.

FALSE

46.

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.

TRUE

47.

Seven years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer. In the current year, Blue Corporation (E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that does not qualify for sale or exchange treatment. With respect to the redemption, Eleanor will have a:

A. $140,000 dividend.

B. $260,000 dividend.

C. $140,000 capital gain.

D. $260,000 capital gain.

E. None of the above.

48.

Seven years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer. In the current year, Blue Corporation ( E & P of $1 million) redeems 600 shares from Eleanor for $260,000 in a transaction that qualifies for sale or exchange treatment. With respect to the redemption, Eleanor will have a:

A. $140,000 dividend.

B. $260,000 dividend.

C. $140,000 capital gain.

D. $260,000 capital gain.

E. None of the above.

49.

Finch Corporation distributes property (basis of $225,000, fair market value of $300,000) to a shareholder in a distribution that is a qualifying stock redemption. The property is subject to a liability of $160,000, which the shareholder assumes. The basis of the property to the shareholder is:

A. $0.

B. $140,000.

C. $225,000.

D. $300,000.

E. None of the above.