Question 1

Which of the following is not a reason for a stock redemption?
A)desire by remaining shareholders to retain control
B)desire by shareholders to reduce the corporate tax liability
C)Redemption of shares is a good corporate investment.
D)No outside market exists for the stock.

Accepted Answer

The answer of Which of the following is not a...

Question 2

Which of the following is not a condition that permits a stock redemption to be treated as a sale?
A)It provides funds for payment of income taxes.
B)It is not essentially equivalent to a dividend.
C)The redemption is substantially disproportionate.
D)The redemption completely terminates the shareholder's interest.

Accepted Answer

A stock redemption treated as a sale occurs under specific conditions that do not include providing funds for payment of income taxes. Conditions that permit such treatment include not being essentially equivalent to a dividend, being substantially disproportionate, or completely terminating the shareholder's interest.

Question 3

The gross estate of a decedent contains $2,000,000 cash and 100% of Davis Corporation stock worth $600,000.Funeral and administrative expenses and state death taxes allowable as estate tax deductions amount to $400,000.The estate owes no other liabilities.The decedent's Davis stock can be
A)redeemed to the extent of the death taxes and the estate's funeral and administrative costs with sale or exchange treatment.
B)redeemed with dividend treatment.
C)redeemed in full with sale or exchange treatment only if the proceeds are used to pay the death taxes and funeral and administrative costs.
D)redeemed to the extent of the death taxes and the funeral and administrative costs with sale or exchange treatment only if the proceeds are used to pay the death taxes and funeral and administrative costs.

Accepted Answer

The answer of The gross estate of a decedent contains...

Question 4

Bruce receives 20 stock rights in a nontaxable distribution.The stock rights have an FMV of $5,000.The common stock with respect to which the rights are issued has a basis of $4,000 and an FMV of $120,000.Bruce allows the stock rights to lapse.He can deduct a loss of
A)$0.
B)$1,000.
C)$5,000.
D)none of the above

Accepted Answer

When stock rights received in a nontaxable distribution are allowed to lapse, no deduction is allowed for the loss. This is because the basis of the rights, for the purpose of determining loss, is considered to be zero.

Question 5

Family Corporation,a corporation controlled by Buddy's family,redeems all of Buddy's stock.For the redemption to be treated as a sale,which one of the following conditions must be met?
A)Buddy cannot be a creditor of the corporation after the redemption.
B)Buddy cannot be an officer of the corporation after the redemption.
C)Buddy cannot acquire an interest,even by inheritance,for 10 years unless the bequest was made prior to the redemption.
D)Buddy must have purchased the redeemed stock from a person whose stock ownership would be attributed to Buddy.

Accepted Answer

For a stock redemption to be treated as a sale, one of the conditions that must be met is that the shareholder (in this case, Buddy) cannot be an officer of the corporation after the redemption. This is to ensure that the redemption does not allow the shareholder to maintain control or significant influence over the corporation, which would otherwise make the transaction resemble a dividend rather than a sale.

Question 6

Identify which of the following statements is true.
A)The distributing corporation's E&P must be reduced by the FMV of nontaxable stock rights distributed to shareholders.
B)A stock redemption can be used to withdraw some assets from a corporation prior to a sale of the business.
C)A shareholder can redeem part of his stock and recognize a capital gain if the corporation has only one shareholder.
D)All of the above are false.

Accepted Answer

The answer of Identify which of the following statements is...

Question 7

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.

Accepted Answer

All of the statements are true. Only stock included in the decedent's gross estate can be redeemed under the Sec.303 provisions, 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, and 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.

Question 8

Joshua owns 100% of Steeler Corporation's stock.Joshua's basis in the stock is $8,000.Steeler Corporation has E&P of $40,000.If Steeler Corporation redeems 60% of Joshua's stock for $50,000,Joshua must report dividend income of
A)$0.
B)$8,000.
C)$40,000.
D)$50,000.

Accepted Answer

When 60% of Joshua's stock is redeemed, he will be left with 40% of the stock. This means that he will still own enough stock to have control over the corporation and therefore the redemption will be treated as a distribution of E&P. The distribution will be equal to the amount of the redemption ($50,000) up to Joshua's basis in the stock ($8,000). The remaining $42,000 will be treated as a dividend and Joshua will have to report it as income. Therefore, the correct answer is C ($40,000).

Question 9

What are the consequences of a stock redemption to the distributing corporation?
A)The corporation recognizes a gain or loss as if it had sold the distributed property for its FMV immediately before the redemption.
B)If the redemption is treated as a dividend,E&P is reduced in the same manner as for a regular dividend.
C)If the redemption is treated as a sale,only accumulated earnings and profits is reduced.
D)All of the above are correct.

Accepted Answer

The answer of What are the consequences of a stock...

Question 10

Which of the following requirements must be met for a redemption to be treated as substantially disproportionate?
A)The shareholder must own less than 50% of the outstanding stock (in terms of voting power)after the redemption.
B)After the redemption,the shareholder must own less than 80% of his percentage ownership of voting stock prior to the redemption.
C)After the redemption,the shareholder must own less than 80% of his percentage ownership of common stock (voting and nonvoting)prior to the redemption.
D)All of the above must be met.

Accepted Answer

All three requirements must be met for a redemption to be treated as substantially disproportionate. The shareholder must own less than 50% of the outstanding stock in terms of voting power, must own less than 80% of their percentage ownership of voting stock prior to the redemption, and must own less than 80% of their percentage ownership of common stock (voting and nonvoting) prior to the redemption.

Question 11

Elijah owns 20% of Park Corporation's single class of stock.Elijah's basis in the stock is $8,000.Park's E&P is $28,000.If Park redeems all of Elijah's stock for $48,000,Elijah must report dividend income of
A)$0.
B)$28,000.
C)$40,000.
D)$48,000.

Accepted Answer

The answer of Elijah owns 20% of Park Corporation's single...

Question 12

Identify which of the following statements is false.
A)A stock redemption is treated as a sale or exchange only if the shareholder's ownership of one particular class of stock is terminated.
B)An individual is not considered to own stock owned by a brother under the family attribution rules of Sec.318.
C)An individual is considered to own the stock owned by his parents,children,spouse,and grandchildren under the family attribution rules of Sec.318.
D)A person who has an option to purchase stock is considered to own the stock.

Accepted Answer

A stock redemption is treated as a sale or exchange regardless of whether the shareholder's ownership of one particular class of stock is terminated. The tax treatment depends on the specific circumstances of the redemption, such as whether it is a complete or partial redemption, and whether it is treated as a dividend or a capital gain. The other statements are generally true under the family attribution rules and stock ownership rules.

Question 13

Identify which of the following statements is true.
A)The Sec.318 family attribution rules can be waived for purposes of the Sec.302(b)(3)complete termination rules even though the redeeming shareholder is a creditor of the corporation.
B)Waiver of the Sec.318 family attribution rules is permitted for all related party stock transactions.
C)For a redemption to be essentially equivalent to a dividend,the shareholder must not have control of the corporation immediately following the redemption.
D)All of the above are false.

Accepted Answer

The answer of Identify which of the following statements is...

Question 14

Identify which of the following statements is true.
A)To have a bona fide partial liquidation,a firm must continue to conduct a qualified trade or business,which it had conducted for a period of more than three years prior to the redemption.
B)To qualify as a partial liquidation,a distribution must result in a bona fide contraction of the corporate business at the corporate level.
C)A partial liquidation of a corporation must be pro rata.
D)All of the above are false.

Accepted Answer

According to the IRS regulations, in order for a distribution to be considered a partial liquidation, it must result in a bona fide contraction of the corporate business at the corporate level. Option A is false because the requirement of conducting a qualified trade or business for more than three years is related to certain tax deferral benefits but not to partial liquidation. Option C is also false because a partial liquidation does not have to be pro rata, although some situations may require pro-rata treatment. Option D is not the correct choice because option B is true.

Question 15

Identify which of the following statements is true.
A)If a stock redemption is made by an estate following the decedent's death,the redemption may receive capital gains treatment only if the money is actually used to pay the death taxes.
B)Attribution rules do not apply to qualified Sec.303 stock redemptions.
C)The value of decedent's stock satisfies the Sec.303 minimum if it is less than 35% of the decedent's gross estate.
D)All of the above are false.

Accepted Answer

The answer of Identify which of the following statements is...

Question 16

Identify which of the following statements is true.
A)Stock ownership attributed to a corporation from one of its shareholders cannot be attributed to another of the corporation's shareholders under the Sec.318 attribution rules.
B)Under the attribution rules relating to stock redemptions,a person who has an option to purchase stock is considered to own the stock.
C)A stock redemption that qualifies as substantially disproportionate is a safe harbor for capital gain treatment.
D)All of the above are true.

Accepted Answer

All the statements provided are true. A) According to Sec. 318 attribution rules, stock ownership attributed to a corporation from one of its shareholders cannot be attributed to another shareholder, preventing circular attribution. B) Under the attribution rules, options to purchase stock are treated as ownership of the stock itself, which can affect control and constructive ownership determinations. C) A stock redemption that is substantially disproportionate qualifies for capital gain treatment, which is a tax advantage under certain conditions, acting as a safe harbor.

Question 17

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
A)the corporation so elects.
B)the corporation discontinues the line of business and the transaction is "essentially equivalent to a dividend."
C)the distribution is made within 24 months of the adoption of a plan of liquidation and the transaction is "not essentially equivalent to a dividend."
D)the distribution is "not essentially equivalent to a dividend" and is made within the year a plan of liquidation is adopted or within the succeeding year.

Accepted Answer

The answer of Blast Corporation manufactures purses and make-up kits.The...

Question 18

Perch Corporation has made paint and paint brushes for the past ten years.Perch Corporation is owned equally by Arnold,an individual,and Acorn Corporation.Perch Corporation has $100,000 of accumulated and current E&P.Both Arnold and Acorn Corporation have a basis in their stock of $10,000.Perch Corporation discontinues the paint brush operation and distributes assets worth $10,000 each to Arnold and Acorn Corporation in redemption of 20% of their stock.Due to the distribution,Arnold and Acorn Corporation must report:
A) 
B) 
C) 
D)

Accepted Answer

The distribution of assets worth $10,000 each to Arnold and Acorn Corporation in redemption of 20% of their stock will be treated as a partial liquidation. Therefore, both Arnold and Acorn Corporation will report the distribution as a capital gain to the extent of their stock basis of $10,000, resulting in a $0 taxable gain. The remaining $8,000 ($10,000 distribution minus $2,000 basis) will be treated as a dividend to the extent of Perch Corporation's current and accumulated E&P of $100,000. As both Arnold and Acorn Corporation own 50% of Perch Corporation, they will each report dividends of $4,000 ($8,000 x 50%). The correct answer is B.

Question 19

All of Sphere Corporation's single class of stock is owned by four unrelated individuals in the following manner: Zack 27%,Xu 24.33%,Yvonne 24.33%,and Win 24.33%.Some of Zack's stock holdings are redeemed by Sphere Corporation,resulting in Zack's interest being reduced to 22.27%.Xu,Yvonne,and Win owned equally the remaining 77.73% of the Sphere stock.How should the redemption of Zack's stock be treated by Zack?
A)dividend income
B)sale transaction
C)return of capital
D)some other treatment

Accepted Answer

The answer of All of Sphere Corporation's single class of...

Question 20

Identify which of the following statements is true.
A)Generally in a stock redemption,if the shareholder's ownership percentage is substantially reduced,the redemption is treated as a sale.
B)The family attribution rules of Sec.318 are as inclusive as the family attribution rules of Sec.267.
C)A 10% shareholder of a corporation is considered to own 10% of any stock that is owned by the corporation under the Sec.318 attribution rules.
D)All of the above are false.

Accepted Answer

Generally, in a stock redemption, if the shareholder's ownership percentage is substantially reduced, the redemption can indeed be treated as a sale for tax purposes. This allows for capital gains treatment rather than dividend treatment, under certain conditions specified by the IRS.

Quiz 7: Corporate Nonliquidating Distributions

Which of the following is not a reason for a stock redemption?

Which of the following is not a condition that permits a stock redemption to be treated as a sale?

The gross estate of a decedent contains $2,000,000 cash and 100% of Davis Corporation stock worth $600,000.Funeral and administrative expenses and state death taxes allowable as estate tax deductions amount to $400,000.The estate owes no other liabilities.The decedent's Davis stock can be

Bruce receives 20 stock rights in a nontaxable distribution.The stock rights have an FMV of $5,000.The common stock with respect to which the rights are issued has a basis of $4,000 and an FMV of $120,000.Bruce allows the stock rights to lapse.He can deduct a loss of

Family Corporation,a corporation controlled by Buddy's family,redeems all of Buddy's stock.For the redemption to be treated as a sale,which one of the following conditions must be met?

Identify which of the following statements is true.

Identify which of the following statements is true.

Joshua owns 100% of Steeler Corporation's stock.Joshua's basis in the stock is $8,000.Steeler Corporation has E&P of $40,000.If Steeler Corporation redeems 60% of Joshua's stock for $50,000,Joshua must report dividend income of

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

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

Elijah owns 20% of Park Corporation's single class of stock.Elijah's basis in the stock is $8,000.Park's E&P is $28,000.If Park redeems all of Elijah's stock for $48,000,Elijah must report dividend income of

Identify which of the following statements is false.

Identify which of the following statements is true.

Identify which of the following statements is true.

Identify which of the following statements is true.

Identify which of the following statements is true.

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

Identify which of the following statements is true.