Question 1

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 not § 306 stock with regards to Nancy.

Accepted Answer

The answer of Three years ago, Darlene received preferred (§...

Question 2

For purposes of the application of § 304 (redemptions through the use of related corporations), a shareholder must own (direct or indirectly) at least 80% of the stock of two more corporations.

Accepted Answer

For § 304 to apply, a shareholder must control (own at least 50% of the voting power or value) two corporations, not 80%.

Question 3

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 a recognized loss of $150,000 ($1 million basis in Warbler stock - $850,000 carryover basis in assets).

Accepted Answer

The answer of Sparrow Corporation purchased 90% of the stock...

Question 4

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.

Accepted Answer

A disproportionate redemption occurs when a shareholder's percentage interest in the corporation decreases as a result of the stock redemption. In this case, the redemption of 400 shares out of 1,000 outstanding shares represents a 40% reduction in the shareholder's ownership percentage. Since the transaction qualifies as a disproportionate redemption, it will cause a reduction in Blackbird's E & P equal to the amount of cash distributed to the shareholder ($300,000) minus the shareholder's basis in the redeemed stock ($20,000, or 400 shares times the $50 per share redemption price). Therefore, Blackbird's E & P will be reduced by $280,000 ($300,000 - $20,000), which is consistent with the information given in the question.

Question 5

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 have dividend income as a result of the sale of Beige stock.

Accepted Answer

The answer of Abel owns all the stock of both...

Question 6

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 $700,000, the same as Green's basis in the assets.

Accepted Answer

When a parent company liquidates a subsidiary, the assets of the subsidiary are distributed to the parent company at the subsidiary's basis in the assets. Therefore, Brown Corporation will have a basis in the assets of $700,000, the same as Green's basis in the assets.

Question 7

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

Accepted Answer

Donovan will actually recognize a $10,000 gain on the sale of the preferred stock. This is because the amount realized ($15,000) is less than the adjusted basis in the stock ($25,000, which includes the $20,000 allocated basis plus the $5,000 loss that was disallowed when the stock was received in the nontaxable dividend). Therefore, there is a gain of $10,000 ($15,000 - $25,000).

Question 8

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

Accepted Answer

Shareholders can defer their gain on a liquidating distribution of installment notes until the point of collection. This is allowed under IRC Section 453B.

Question 9

Swan Corporation incurred $10,000 of accounting fees and $15,000 of legal fees in connection with the redemption of stock from its shareholders. None of the expenditures are deductible by Swan.

Accepted Answer

Accounting and legal fees incurred in connection with a stock redemption are not deductible by the corporation.

Question 10

When a shareholder receives property subject to a liability pursuant to a complete liquidation (not a parent-subsidiary liquidation), the fair market value of the property is reduced by the amount of the liability in computing the shareholder's gain (or loss) on the liquidation.

Accepted Answer

This statement is true as per the Internal Revenue Code Section 334(b)(1), which states that "The amount realized by a shareholder on the disposition of a share in a distribution in complete liquidation of a corporation shall be the fair market value of the property received by him, reduced by the amount of any liability of the corporation assumed by the shareholder in the distribution."

Question 11

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

Accepted Answer

If a liquidation qualifies under § 332, any shareholder (not just minority shareholders) will not recognize any gain or loss on the liquidation of their stock. This is because under § 332, the liquidation is treated as a complete redemption of the shareholder's stock, meaning that the shareholder is considered to have sold their stock back to the corporation at its fair market value. Therefore, the shareholder only recognizes gain or loss if the fair market value of assets received differs from the fair market value of their stock at the time of redemption, not their basis in the stock.

Question 12

Section 332 does not apply to a parent-subsidiary liquidation if the subsidiary corporation is insolvent on the date of the liquidation.

Accepted Answer

Section 332 of the Internal Revenue Code provides rules for the tax-free liquidation of a subsidiary corporation by its parent corporation. However, this section does not apply if the subsidiary is insolvent on the date of the liquidation. In such cases, different tax rules may apply.

Question 13

The related-party loss limitation in a complete liquidation can apply to a distribution or sale of property while the built-in loss limitation applies only to distributions of property.

Accepted Answer

The statement is incorrect. The built-in loss limitation can also apply to sales of property in a complete liquidation, not just distributions.

Question 14

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 § 306 stock for Tammy.

Accepted Answer

According to § 306, if the transferred property is considered to be "disqualified preferred stock," then it is not qualified for nonrecognition treatment under § 351. Therefore, as the preferred stock is disqualified stock for Tammy, the transaction does not qualify under § 351.

Question 15

As a general rule, a liquidating corporation recognizes gains and losses on the distribution of property in complete liquidation.

Accepted Answer

When a corporation is in the process of liquidating, it is recognized as a separate taxable entity until the completion of the liquidation process. During this process, the corporation must recognize any gains or losses on the distribution of property to its shareholders, which will be taxed accordingly. Therefore, the statement is true.

Question 16

One difference between the tax treatment accorded nonliquidating and liquidating distributions is with respect to the recognition of losses by the distributing corporation. As a general rule, a corporation recognizes losses on liquidating distributions of depreciated property (fair market value less than basis) but not on nonliquidating distributions of such property.

Accepted Answer

This statement is true. When a corporation makes a liquidating distribution of depreciated property, it recognizes any losses on that distribution. However, on a nonliquidating distribution of such property, the corporation does not recognize any losses. This is because the corporation still owns the property and any loss would not be realized until the property is sold or otherwise disposed of.

Question 17

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.

Accepted Answer

This statement is true. The built-in loss limitation only applies to losses that were recognized prior to the transfer of the property to the corporation. Any losses that occur after the transfer due to a decline in fair market value are not subject to this limitation.

Question 18

The related-party loss limitation does not apply to a distribution of property in complete liquidation that was appreciated (fair market value greater than basis) when it was transferred to the corporation.

Accepted Answer

The answer of The related-party loss limitation does not apply...

Question 19

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.

Accepted Answer

The answer of A subsidiary corporation is liquidated at a...

Question 20

Legal dissolution under state law is not required for a liquidation to be complete for tax purposes.

Accepted Answer

According to the IRS, legal dissolution is not required for a liquidation to be deemed complete for tax purposes. The determination of whether a liquidation is complete or not depends on the facts and circumstances of each case. However, it is recommended that companies consult with legal and tax experts to ensure all requirements are met.

Quiz 6: Corporations: Redemptions and Liquidations