Question 1

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 2

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 3

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.

Accepted Answer

According to IRS regulations, if preferred stock is received through a nontaxable stock dividend, it is considered § 306 stock. Therefore, when Darlene gives the preferred stock to her sister Nancy, it still retains its § 306 status.

Question 4

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 5

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

The built-in loss limitation only applies to losses that were recognized or could have been recognized at the time of the transfer of the property to the corporation. Losses attributable to a decline in fair market value after the transfer are not subject to this limitation.

Question 6

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.

Accepted Answer

The answer of For purposes of the application of §...

Question 7

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.

Accepted Answer

Lucinda's basis in the land will be $90,000, which is Coral Corporation's basis in the land. The liability does not affect the basis of the property received in the distribution.

Question 8

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 answer of The related-party loss limitation in a complete...

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

Expenses related to the redemption of stock are considered capital expenditures and are not deductible for tax purposes.

Question 10

The sale of § 306 stock to a third party results in dividend income to the shareholder.

Accepted Answer

§ 306 of the Internal Revenue Code addresses the treatment of certain stock redemptions as dividends. The sale of § 306 stock to a third party does not result in dividend income to the shareholder.

Question 11

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

When a shareholder sells stock to a corporation that they control, the transaction can be recharacterized as a dividend if the corporation has sufficient earnings and profits (E&P), resulting in dividend income for the shareholder.

Question 12

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 13

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

Accepted Answer

The answer of Legal dissolution under state law is required...

Question 14

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 specifically states that it does not apply to a liquidation of a subsidiary corporation if the subsidiary is insolvent on the date of the liquidation. Therefore, the exception applies and Section 332 does not have to be followed in this situation.

Question 15

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 the distribution of stock is not proportional to the ownership interests of the shareholders. In this case, the redemption of 400 shares out of 1,000 shares is not proportional and thus qualifies as a disproportionate redemption. As a result of the distribution, Blackbird's E & P is reduced by the amount of the distribution allocated to the redeemed shares, which is $300,000 times (400/1,000) or $120,000. Therefore, Blackbird's E & P is reduced to $700,000 - $120,000 or $580,000.

Question 16

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 one corporation acquires the assets of another corporation that it had previously owned a majority interest in, the basis in the assets to the acquiring corporation will be the same as the basis the acquired corporation had in the assets. Therefore, Brown Corporation will have a basis of $700,000 in the assets it acquires from Green Corporation.

Question 17

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

Accepted Answer

When a corporation makes a liquidating distribution of installment notes to its shareholders, it will generally recognize gain or loss. The gain or loss will be the difference between the fair market value of the notes and their adjusted basis.

Question 18

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

Accepted Answer

The answer of As a general rule,a liquidating corporation recognizes...

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

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.

Accepted Answer

The answer of If a liquidation qualifies under § 332,any...

Quiz 6: Corporations: Redemptions and Liquidations