Question 1

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 2012.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.

Accepted Answer

Based on the given information, the redemption of $1.2 million of Heron stock from the estate would qualify under § 303 as a redemption to pay death taxes and receive sale or exchange treatment. This is because the death taxes and expenses of the estate exceed 35% of the adjusted gross estate, which is a requirement under § 303. Therefore, the answer is A.

Question 2

Sally and her mother are the sole shareholders of Owl Corporation.During the current year,Owl distributes cash in redemption of all of Sally's stock.Sally continues to be employed as controller for Owl after the redemption.The distribution is a complete termination redemption resulting in sale or exchange treatment for Sally.

Accepted Answer

False

Question 3

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

Accepted Answer

Stock redemptions can be treated as capital gains, not just dividend distributions, depending on the circumstances of the redemption.

Question 4

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.

Accepted Answer

The answer of Vireo Corporation redeemed shares from its sole...

Question 5

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.

Accepted Answer

The answer of At the time of her death,Janice owned...

Question 6

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.

Accepted Answer

The loan to Robin Corporation does not constitute a prohibited interest for purposes of the family attribution waiver, so there is no conflict of interest or violation of any regulations.

Question 7

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

Accepted Answer

The answer of In determining whether a distribution qualifies as...

Question 8

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.

Accepted Answer

In a qualifying stock redemption, the basis of the stock is important for determining gain or loss. However, losses on sales or exchanges of stock to the corporation are generally not recognized if the transaction qualifies as a redemption of stock. The IRS typically treats such losses as capital losses, but they are disallowed in transactions that are essentially equivalent to a dividend or do not significantly change the shareholder's interest in the corporation. Since Yolanda still retains a significant interest in Amber Corporation, her loss would likely be disallowed under these rules.

Question 9

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.

Accepted Answer

The termination of a business test for partial liquidation is an objective test that does not require a ruling from the IRS. It is based on whether the company has sold or distributed a substantial part of its assets, ceased a significant portion of its business activities, and does not intend to continue its business operations.

Question 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.

Accepted Answer

Paul's basis in the 600 redeemed shares was $30,000. The amount realized from the redemption was $100,000. Therefore, Paul has a long-term capital gain of $70,000 ($100,000 - $30,000).

Question 11

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.

Accepted Answer

In a partial liquidation, a distribution is considered essentially equivalent to a dividend if it does not result in a genuine contraction of the corporation's business. If it does result in a genuine contraction, it is not considered essentially equivalent and may have different tax consequences.

Question 12

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.

Accepted Answer

The answer of Six years ago,Ronald and his mom each...

Question 13

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

Accepted Answer

When a corporation redeems stock, the shareholder receives a cash payment in exchange for their stock, which is treated as a sale or exchange of their stock. This may result in capital gains tax for the shareholder. In contrast, with a dividend distribution, the shareholder receives a payout from the corporation's earnings, which is generally taxed at a lower rate than the capital gains tax rate. Therefore, corporate shareholders generally receive less favorable tax treatment from a qualifying stock redemption than from a dividend distribution.

Question 14

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.

Accepted Answer

The answer of The Code treats corporate distributions that are...

Question 15

As a result of a redemption,a shareholder's interest (direct and indirect)in the corporation decreased from 58% to 45%.The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

Accepted Answer

The shareholder's interest decreasing from 58% to 45% indicates that the redemption was indeed disproportionate, and as such, it qualifies for sale or exchange treatment.

Question 16

In applying the stock attribution rules to a stock redemption,stock owned by a shareholder who owns 65% of a corporation is deemed to be owned in full by the corporation.

Accepted Answer

According to the stock attribution rules, stock owned by a shareholder who owns 65% or more of a corporation is deemed to be owned in full by the corporation. Therefore, in a stock redemption scenario, the corporation is deemed to own all of the redeemed stock owned by the majority shareholder.

Question 17

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

Accepted Answer

The answer of To qualify a partial liquidation under the...

Question 18

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 $150,000 as a result of the distribution.

Accepted Answer

The distribution of land subject to a mortgage greater than its fair market value will result in a loss, not a gain. The gain in this scenario is also incorrect since the total distribution of $600,000 exceeds the corporation's E&P of $600,000, which may result in a dividend rather than a stock redemption.

Question 19

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

Accepted Answer

The answer of In a not essentially equivalent redemption [§...

Question 20

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

Accepted Answer

According to IRS rules, a shareholder's holding period for property acquired through a stock redemption begins on the date of distribution, not the date of acquisition of the redeemed stock. This is important for calculating capital gains taxes.

Quiz 6: Corporations: Redemptions and Liquidations