Question 1

All of the stock in Robin Corporation (E & P of $800,000)is held by three unrelated individuals as follows: Shontelle has 300 shares,Marta has 200 shares,and Diego owns 500 shares.Robin Corporation redeems 200 of Diego's shares (basis of $10,000)for $40,000.If Diego's stock is a capital asset that has been held for the requisite holding period,he has a long-term capital gain of $30,000.

Accepted Answer

Since Diego's basis for the 200 shares redeemed was $10,000, but Robin Corporation redeemed them for $40,000, he has a capital gain of $30,000. If the shares were held for more than one year (which is likely since it was not specified otherwise), it would qualify as a long-term capital gain. Therefore, the statement is true.

Question 2

The tax treatment of corporate distributions at the shareholder level does not depend on:

Accepted Answer

The answer of The tax treatment of corporate distributions at...

Question 3

Bluebird Corporation's 1,000 shares outstanding are owned as follows: Lucinda,350 shares;Carl (Lucinda's father),300 shares;and Nancy (Lucinda's sister),350 shares.During the current year,Bluebird (E & P of $800,000)redeemed 200 shares of Lucinda's stock for $50,000.If Lucinda had acquired the 200 shares five years ago for $10,000,she will have a long-term capital gain of $40,000 from the redemption.

Accepted Answer

The answer of Bluebird Corporation's 1,000 shares outstanding are owned...

Question 4

In a redemption to pay death taxes,stock in corporations in which the decedent held a 20% or more interest is treated as stock in a single corporation for purposes of determining whether the value of stock owned by the decedent exceeds 35% of the value of the decedent's adjusted gross estate.

Accepted Answer

This is correct as per the IRS regulations. When a decedent's estate is subject to death taxes, the value of stock owned in corporations in which the decedent had a 20% or more interest is combined and treated as stock in a single corporation for the purpose of calculating the 35% value limitation on estate tax deductions for redemptions to pay death taxes.

Question 5

Grackle Corporation (E & P of $900,000)distributes cash of $100,000 and land (fair market value of $500,000;basis of $410,000)to a shareholder in a qualifying stock redemption.The land distributed is subject to a mortgage of $550,000.Grackle will recognize a gain of $140,000 as a result of the distribution.

Accepted Answer

Grackle Corporation will recognize a gain of $140,000, which is the difference between the fair market value of the land ($500,000) and its basis ($410,000), as the mortgage exceeds the fair market value, the gain is limited to the difference between the fair market value and the basis.

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 constitutes a prohibited interest for purposes of the family attribution waiver.

Accepted Answer

The answer of Reginald and Roland (Reginald's son)each own 50%...

Question 7

Red Corporation,a calendar year taxpayer,has taxable income of $600,000.Among its transactions for the year are the following:  Disregarding any provision for Federal income taxes,Red Corporation's current E & P is:

Accepted Answer

The answer of Red Corporation,a calendar year taxpayer,has taxable income...

Question 8

For a stock redemption to qualify for sale or exchange treatment under § 303 (redemption to pay death taxes),it need not satisfy any of the § 302 redemption provisions.

Accepted Answer

A § 303 redemption is a specific type of redemption that is related to the payment of death taxes. It does not have to meet all of the requirements of a § 302 redemption to qualify for sale or exchange treatment.

Question 9

In applying the stock attribution rules to a stock redemption,stock owned by a 50% or more shareholder of a corporation is deemed to be owned in full by the corporation.

Accepted Answer

This is true according to the stock attribution rules. If a shareholder owns 50% or more of a corporation's stock, any stock owned by that shareholder is deemed to be owned by the corporation in full. This is important in determining the tax consequences of a stock redemption.

Question 10

Blue Corporation,a cash basis taxpayer,has taxable income of $700,000 for the current year.Blue elected $80,000 of § 179 expense.It also had a related party loss of $30,000 and a realized (not recognized)gain from an involuntary conversion of $85,000.It paid Federal income tax of $185,000 and a nondeductible fine of $20,000.Blue's current E & P is:

Accepted Answer

The answer of Blue Corporation,a cash basis taxpayer,has taxable income...

Question 11

Betty's adjusted gross estate is $7 million.The death taxes and funeral and administration expenses of her estate total $800,000.Included in Betty's gross estate is stock in Heron Corporation,valued at $2.1 million as of the date of her death in 2009.Betty had acquired the stock six years ago at a cost of $410,000.If Heron Corporation redeems $800,000 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

The answer of Betty's adjusted gross estate is $7 million.The...

Question 12

Noncorporate shareholders generally prefer a nonqualified stock redemption over a qualifying stock redemption due to the availability of the dividends received deduction.

Accepted Answer

The answer of Noncorporate shareholders generally prefer a nonqualified stock...

Question 13

At a time when Blackbird Corporation had E & P of $950,000 and 1,000 shares of stock outstanding,the corporation distributed $250,000 to redeem 300 shares of its stock.The transaction qualified as a disproportionate redemption for the shareholder.Blackbird's E & P is reduced by $285,000 as a result of the distribution.

Accepted Answer

In a disproportionate redemption, E & P is reduced by the lesser of the amount distributed ($250,000) or the ratable share of E & P attributable to the redeemed shares. The ratable share is 30% of $950,000, which is $285,000. However, the reduction is limited to the distribution amount, $250,000.

Question 14

A shareholder's holding period of property acquired in a stock redemption includes that of the distributing corporation.

Accepted Answer

The holding period of property acquired in a stock redemption does not include that of the distributing corporation; it begins on the day after the redemption.

Question 15

Sally and her brother 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

Since Sally's stock is completely redeemed, it is considered a sale or exchange for her, resulting in capital gains or losses treatment. However, her continued employment with the corporation does not affect the treatment of the redemption.

Question 16

A shareholder's holding period of property acquired in a stock redemption includes that of the distributing corporation.

Accepted Answer

The answer of A shareholder's holding period of property acquired...

Question 17

In a not essentially equivalent redemption [§ 302(b)(1)],the family attribution rules of § 318 apply.

Accepted Answer

When a redemption is not essentially equivalent, the family attribution rules of § 318 apply.

Question 18

Beige Corporation (a calendar year taxpayer)has taxable income of $150,000,and its financial records reflect the following for the year.  Beige Corporation's current E & P is:

Accepted Answer

To calculate current E&P, we start with taxable income and make adjustments for items that are included in taxable income, but not in E&P and items that are included in E&P, but not in taxable income. 
Starting with taxable income of $150,000, we make the following adjustments: 
1. Add back charitable contributions: $10,000 
2. Subtract dividends received deduction: $8,000 
3. Subtract excess depletion: $25,000 
4. Add amortization: $5,000 
5. Subtract non-deductible expense: $25,000 
So, Beige Corporation's current E&P is:
$150,000 + $10,000 - $8,000 - $25,000 + $5,000 - $25,000 = $107,000. 
Therefore, the correct answer is D.

Question 19

In applying the stock attribution rules to a stock redemption,a shareholder is treated as owning the stock of the following family members: spouses,children,grandchildren,siblings,and parents.

Accepted Answer

The stock attribution rules for a stock redemption include spouses, children, grandchildren, and parents, but not siblings.

Question 20

In 2007,Floyd carried out a successful complete termination redemption of his stock in Gray Corporation.Floyd was able to qualify the transaction as a complete termination redemption only by use of the family attribution waiver.In 2010,Floyd receives stock in Gray Corporation as a gift from his father.Floyd has acquired a prohibited interest within the 10-year postredemption period and,as a result,the 2007 redemption no longer qualifies as a complete termination redemption.

Accepted Answer

According to the information given, Floyd received stock in Gray Corporation as a gift from his father in 2010, which is within the 10-year postredemption period. As a result, Floyd has acquired a prohibited interest, which means that the 2007 redemption no longer qualifies as a complete termination redemption. Therefore, the statement is true.

Quiz 19: Corporations: Distributions Not in Complete Liquidation

The tax treatment of corporate distributions at the shareholder level does not depend on:

In a redemption to pay death taxes,stock in corporations in which the decedent held a 20% or more interest is treated as stock in a single corporation for purposes of determining whether the value of stock owned by the decedent exceeds 35% of the value of the decedent's adjusted gross estate.

Red Corporation,a calendar year taxpayer,has taxable income of $600,000.Among its transactions for the year are the following: Disregarding any provision for Federal income taxes,Red Corporation's current E & P is:

For a stock redemption to qualify for sale or exchange treatment under § 303 (redemption to pay death taxes),it need not satisfy any of the § 302 redemption provisions.

In applying the stock attribution rules to a stock redemption,stock owned by a 50% or more shareholder of a corporation is deemed to be owned in full by the corporation.

Noncorporate shareholders generally prefer a nonqualified stock redemption over a qualifying stock redemption due to the availability of the dividends received deduction.

A shareholder's holding period of property acquired in a stock redemption includes that of the distributing corporation.

A shareholder's holding period of property acquired in a stock redemption includes that of the distributing corporation.

In a not essentially equivalent redemption [§ 302(b)(1)],the family attribution rules of § 318 apply.

Beige Corporation (a calendar year taxpayer) has taxable income of $150,000,and its financial records reflect the following for the year. Beige Corporation's current E & P is:

In applying the stock attribution rules to a stock redemption,a shareholder is treated as owning the stock of the following family members: spouses,children,grandchildren,siblings,and parents.