Deck 6: Corporations: Redemptions and Liquidations

Question 1

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

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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.

Question 5

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.

Question 6

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.

Question 7

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

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.

Question 9

In 2008, 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 2011, 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 2008 redemption no longer qualifies as a complete termination redemption.

Question 10

The Code treats corporate distributions that are a return from a shareholder's investment as sales or exchanges and corporate distributions that are a return of a shareholder's investment as dividends.

Question 11

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.

Question 12

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 2011. 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.

Question 13

For purposes of a partial liquidation, the "not essentially equivalent to a dividend" test is applied at the corporate level.

Question 14

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.

Question 15

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.

Question 16

A shareholder's basis in property received in a stock redemption is the property's fair market value.

Question 17

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.

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.

Question 19

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.

Question 20

A partial liquidation cannot result in sale or exchange treatment to a shareholder if it results in a pro rata stock redemption.

Question 21

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.

Question 22

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.

Question 23

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).

Question 24

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.

Question 25

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.

Question 26

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.

Question 27

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.

Question 28

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.

Question 29

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.

Question 30

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.

Question 31

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.

Question 32

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

Question 33

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.

Question 34

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.

Question 35

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

Question 36

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.

Question 37

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.

Question 38

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.

Question 39

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.

Question 40

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

Question 41

A parent corporation must make the § 338 election by the fifteenth day of the third month following the close of the tax year in which a qualified stock purchase occurs.

Question 42

Kite Corporation has 1,000 shares of stock outstanding. Kent owns 250 shares, Kent's father owns 150 shares, Kent's brother owns 250 shares, and Kent's son owns 50 shares. Plover Corporation owns the other 300 shares in Kite Corporation. Kent owns 60% of the stock in Plover Corporation. Applying the § 318 stock attribution rules, how many shares does Kent own in Kite Corporation?

A) 250.
B) 400.
C) 450.
D) 630.
E) None of the above.

Question 43

Hannah, Greta, and Winston own the stock in Redpoll Corporation (E & P of $900,000) as follows: Hannah, 600 shares; Greta, 400 shares; and Winston, 1,000 shares. Greta is Hannah's daughter, and Winston is Hannah's brother. Redpoll Corporation redeems 400 of Hannah's shares (basis of $55,000) for $240,000. Hannah purchased the stock three years ago as an investment. With respect to the stock redemption, Hannah has:

A) Dividend income of $185,000.
B) Dividend income of $240,000.
C) Long-term capital gain of $185,000.
D) Long-term capital gain of $240,000.
E) None of the above.

Question 44

Lupe and Rodrigo, father and son, each own 50% of the stock outstanding of Heron Corporation (E & P of $400,000). During the current year, Heron redeems all of Lupe's shares for $250,000. The transaction cannot qualify as a complete termination redemption if:

A) Lupe filed an agreement with his return to notify the IRS of any prohibited interest acquired in the 10-year postredemption period.
B) Lupe continued to serve on Heron Corporation's board of directors for one year following the redemption.
C) Lupe received a $250,000 note receivable from Heron in the stock redemption.
D) Lupe loaned Heron Corporation $50,000 two years following the redemption.
E) More than one of the above is correct.

Question 45

Hazel, Emily, and Frank, unrelated individuals, own all of the stock in Wren Corporation (E & P of $1.2 million) as follows: Hazel, 1,300 shares; Emily, 400 shares; and Frank, 300 shares. Wren redeems 300 of Hazel's shares (basis of $60,000) for $450,000. With respect to the distribution in redemption of the stock:

A) Hazel has a capital gain of $390,000.
B) Hazel has dividend income of $450,000.
C) Hazel has dividend income of $390,000.
D) Hazel has a capital gain of $450,000.
E) None of the above.

Question 46

Julian, Berta, and Maria own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation (E & P of $750,000). Berta is Julian's sister, and Maria is Julian's aunt. Caramel Corporation redeems all of Julian's stock for $420,000. Julian paid $200 a share for the stock five years ago. Julian continued to serve on Caramel's board of directors after the redemption. With respect to the redemption:

A) Dividend income of $420,000.
B) Long-term capital gain of $420,000.
C) Dividend income of $340,000.
D) Long-term capital gain of $340,000.
E) None of the above.

Question 47

One advantage of acquiring a corporation via an asset purchase instead of a stock purchase is that an asset purchase avoids the transfer of the acquired corporation's liabilities.

Question 48

Cardinal Corporation has 1,000 shares of common stock outstanding. John owns 400 of the shares, John's father owns 300 shares, John's daughter owns 200 shares, and Redbird Corporation owns 100 shares. John owns 70% of the stock in Redbird Corporation. How many shares is John deemed to own in Cardinal Corporation under the attribution rules of § 318?

A) 400.
B) 600.
C) 700.
D) 1,000.
E) None of the above.

Question 49

Five years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 1,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $100,000 and a fair market value of $270,000 on the date of the transfer. In the current year, Blue Corporation (E & P of $800,000) redeems 250 shares from Eleanor for $220,000 in a transaction that does not qualify for sale or exchange treatment. With respect to the redemption, Eleanor will have a:

A) $195,000 capital gain.
B) $220,000 capital gain.
C) $195,000 dividend.
D) $220,000 dividend.
E) None of the above.

Question 50

Ember Corporation has 500 shares of stock outstanding: Zoe owns 170 shares, Leticia owns 95 shares, and Samuel owns 55 shares. Sage Partnership owns the other 180 shares in Ember Corporation. Zoe, Leticia, and Samuel, all unrelated, are equal partners of the Sage Partnership. In applying the stock attribution rules under § 318:

A) Zoe owns, directly and indirectly, 350 shares in Ember Corporation.
B) Samuel owns, directly and indirectly, 115 shares in Ember Corporation.
C) Leticia owns, directly and indirectly, 95 shares in Ember Corporation.
D) Sage Partnership owns, directly and indirectly, 180 shares in Ember Corporation.
E) None of the above.

Question 51

Lucinda owns 1,100 shares of Blackbird Corporation stock at a time when Blackbird has 2,000 shares of stock outstanding. The remaining shareholders are unrelated to Lucinda. What is the minimum number of shares Blackbird must redeem from Lucinda so that the transaction will qualify as a disproportionate redemption?

A) 880.
B) 484.
C) 393.
D) 220.
E) None of the above.

Question 52

Kingbird Corporation (E & P of $800,000) has 1,000 shares of stock outstanding. That stock is held by Amata (550 shares) and Esteban (450 shares), who are unrelated individuals. Kingbird redeems 200 of Amata's shares for $1,000 per share. Amata paid $300 per share for her Kingbird stock nine years ago. Which of the following statements is correct with respect to the stock redemption?

A) Amata has dividend income of $200,000.
B) Amata has a long-term capital gain of $140,000.
C) Amata's basis in her remaining 350 shares is $60,000.
D) Kingbird reduces its E & P by $200,000.
E) None of the above.

Question 53

Five years ago, Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 1,000 shares of Blue Corporation in a transaction that qualified under § 351. The assets had a tax basis to her of $100,000 and a fair market value of $270,000 on the date of the transfer. In the current year, Blue Corporation ( E & P $800,000) redeems 250 shares from Eleanor for $220,000 in a transaction that qualifies for sale or exchange treatment. With respect to the redemption, Eleanor will have a:

A) $195,000 capital gain.
B) $220,000 capital gain.
C) $195,000 dividend.
D) $220,000 dividend.
E) None of the above.

Question 54

Finch Corporation distributes property (basis of $140,000, fair market value of $200,000) to a shareholder in a distribution that is a qualifying stock redemption. The property is subject to a liability of $90,000, which the shareholder assumes. The basis of the property to the shareholder is:

A) $0.
B) $50,000.
C) $110,000.
D) $140,000.
E) None of the above.

Question 55

For purposes of the § 338 election, a corporation must acquire, in a taxable transaction, at least 80% of the stock (voting power and value) of another corporation within an 12-month period.

Question 56

Currently, Brown Corporation (E & P of $800,000) has 1,000 shares of common stock outstanding. Pat owns 200 shares. His wife owns 400 shares, his daughter owns 100 shares, and his father owns 300 shares. Two years ago, Pat transferred $30,000 to Brown Corporation in exchange for 100 newly issued shares of nonvoting preferred stock. In the current year, Brown Corporation redeems Pat's preferred stock for $50,000, its fair market value. With respect to the distribution in redemption of the preferred stock:

A) Pat has dividend income of $20,000.
B) Pat has dividend income of $50,000.
C) Pat has a long-term capital gain of $20,000.
D) Pat has a long-term capital gain of $50,000.
E) None of the above.

Question 57

Which of the following is an incorrect statement regarding the application of the § 318 stock attribution rules?

A) Stock owned by a partner is deemed to be owned in full by a partnership.
B) Stock owned by a beneficiary is deemed to be owned in full by an estate.
C) An individual is deemed to own the shares owned by his or her spouse, children, grandchildren, or parents.
D) Stock owned by a corporation is deemed to be owned proportionately by any shareholder owning 50% or more of the corporation's stock.
E) None of the above.

Question 58

A subsidiary is liquidated pursuant to § 332. The parent has held 100% of the stock in the subsidiary for the past ten years. The subsidiary has E & P of $600,000 at the time of liquidation. The subsidiary's E & P disappears as a result of the liquidation.

Question 59

Leon owns 400 shares of the 1,000 outstanding shares of Crane Corporation (E & P of $650,000). None of the other shareholders of Crane are related to Leon. Leon acquired his Crane shares ten years ago for $60,000. Crane has operated several trades or businesses for more than five years. In the current year, Crane sells the assets of one of those trades or businesses and distributes the proceeds from the asset sale to the shareholders in a pro rata stock redemption. In this transaction, Leon receives $180,000 in redemption of 250 shares of Crane. As a result of this transaction, Leon will recognize:

A) No gain or loss.
B) $142,500 dividend income.
C) $180,000 dividend income.
D) $142,500 long-term capital gain.
E) None of the above.

Question 60

If a parent corporation makes a § 338 election, the subsidiary recognizes gains and losses as result of a deemed sale of its assets.

Question 61

Canary Corporation has 1,000 shares of stock outstanding. It redeems in a qualifying stock redemption 350 shares for $400,000 at a time when it has paid-in capital of $100,000 and E & P of $1 million. What would be the charge to Canary's E & P as a result of the redemption?

A) $400,000.
B) $350,000.
C) $140,000.
D) $40,000.
E) None of the above.

Question 62

Which of the following is an incorrect statement regarding the tax consequences of a § 306 stock sale?

A) No loss is recognized on the sale.
B) The shareholder generally recognizes ordinary income equal to the fair market value of the preferred stock on the date of the stock dividend.
C) The issuing corporation reduces its E & P by the amount of sales proceeds.
D) Any ordinary income recognized by the shareholder qualifies for the 15% (or 0%) maximum tax rate that applies to dividend income.
E) None of the above.

Question 63

The adjusted gross estate of Keith, decedent, is $6 million. Included in the gross estate is stock in Gold Corporation (E & P of $750,000), a closely held corporation, valued at $2.4 million as of the date of Keith's death in 2011. Keith had acquired the stock twelve years ago at a cost of $420,000. Death taxes and funeral and administration expenses for Keith's estate are $1.2 million. Gold Corporation redeems one-half of the stock from Keith's estate in a § 303 redemption to pay death taxes using property with a fair market value of $1.2 million (adjusted basis of $950,000). Which of the following is a correct statement regarding the tax consequences of this redemption?

A) The estate will have a basis of $950,000 in the property received from Gold Corporation in redemption of the estate's stock.
B) Gold Corporation will recognize gain of $250,000 on the distribution of the property to Keith's estate.
C) Gold Corporation will not reduce its E & P as a result of the distribution of the property to Keith's estate.
D) The estate will recognize a $990,000 long-term capital gain on the redemption.
E) None of the above.

Question 64

Vulture Corporation distributes land (basis of $250,000, fair market value of $475,000) to Bonita, a shareholder, to carry out a qualifying stock redemption. The land is distributed subject to a $300,000 liability. Bonita had a basis of $25,000 in the shares redeemed. With respect to the redemption:

A) Vulture Corporation will recognize a gain of $50,000.
B) Vulture Corporation will recognize a gain of $225,000.
C) Bonita will recognize a gain of $450,000.
D) Bonita will have a basis of $175,000 in land.
E) None of the above.

Question 65

In the current year, Loon Corporation made a distribution in redemption of some of its shares. Loon incurred expenditures in connection with the redemption totaling $35,000 (accounting fees of $9,000, legal fees of $20,000, and brokerage fees of $6,000). The distribution was a qualifying stock redemption. How much of the $35,000 is deductible in the current year?

A) $6,000.
B) $9,000.
C) $29,000.
D) $35,000.
E) None of the above.

Question 66

The stock in Black Corporation is owned entirely by Nancy (80%) and Wanda (20%), mother and daughter. Three years ago, Nancy contributed land (basis of $200,000, fair market value of $250,000) to Black Corporation in a transaction that qualified under § 351. In the current year and pursuant to a complete liquidation of Black, the land is distributed proportionately to Nancy and Wanda. At the time of the liquidating distribution, the land had a fair market value of $100,000. What amount of loss will Black Corporation recognize on the distribution of the land?

A) $20,000.
B) $80,000.
C) $100,000.
D) $150,000.
E) None of the above.

Question 67

Pursuant to a complete liquidation, Oriole Corporation distributes to its shareholders land with a basis of $450,000 and a fair market value of $550,000. The land is subject to a liability of $600,000. What is Oriole's recognized gain or loss on the distribution?

A) $0.
B) $100,000 gain.
C) $150,000 gain.
D) $50,000 loss.
E) None of the above.

Question 68

Which of the following statements is correct with respect to a partial liquidation?

A) The genuine contraction of a corporate business requirement is a subjective test that taxpayers cannot rely upon with certainty.
B) The distribution of proceeds from the sale of marketable securities (held for investment) to shareholders in exchange for part of their stock will satisfy the not essentially equivalent to a dividend test.
C) A stock redemption pursuant to a partial liquidation cannot be pro rata with respect to the shareholders.
D) The termination of a business test requires that the distributing corporation actively conducted at least three trades or businesses for at least five years.
E) None of the above.

Question 69

In comparing a qualifying stock redemption with a complete liquidation, which of the following statements is incorrect?

A) Liquidations and qualifying stock redemptions parallel each other in terms of the effect that E & P has on the nature of the gain or loss recognized by the shareholder.
B) The basis of property acquired is its fair market value on the date of distribution for both a qualifying stock redemption and a liquidation.
C) Both a qualifying stock redemption and a complete liquidation produce sale or exchange treatment to the shareholder.
D) A corporation will recognize gain upon the distribution of appreciated property for both a qualifying stock redemption and a complete liquidation, but a corporation will recognize loss upon a distribution of depreciated property only for a qualifying stock redemption.
E) Section 267 disallows recognition of losses between related parties in a qualifying stock redemption but not in a complete liquidation.

Question 70

Which of the following is a correct statement regarding a redemption to pay death taxes under § 303?

A) An estate recognizes gain on the redemption equal to the excess of the distribution proceeds over the decedent's basis in the stock.
B) The value of the stock in the decedent's gross estate must exceed 40% of the value of the adjusted gross estate.
C) A corporation recognizes gains and losses on the distribution of property in the redemption.
D) The redemption need not satisfy any of the § 302 qualifying stock redemption provisions.
E) None of the above.

Question 71

Magenta Corporation acquired land in a § 351 exchange one year ago. The land had a basis of $320,000 and a fair market value of $350,000 on the date of the transfer. Magenta Corporation has two shareholders, Mark (70%) and Megan (30%), who are brother and sister. Magenta Corporation adopts a plan of liquidation in the current year. On this date, the land has decreased in value to $250,000. Magenta Corporation sells the land for $250,000 and distributes the proceeds pro rata to Mark and Megan. What amount of loss may Magenta Corporation recognize on the sale of the land?

A) $0.
B) $21,000.
C) $30,000.
D) $100,000.
E) None of the above.

Question 72

The gross estate of April, decedent, includes stock in Brown Corporation and Parrot Corporation valued at $700,000 and $2.3 million, respectively. April's adjusted gross estate is $7.5 million. At the time of her death in 2011, April owned 24% of the Brown stock and 40% of the Parrot stock. Immediate members of April's family own the remaining shares of both Brown and Parrot. Those individuals are also the sole beneficiaries of April's estate. Death taxes and funeral and administration expenses for April's estate are $700,000. April had a basis of $130,000 in the Brown stock and $290,000 in the Parrot stock. Brown Corporation (E & P of $900,000) distributed land worth $700,000 (basis of $650,000) to April's estate in redemption of all of the Brown stock. Which of the following is a correct statement regarding the tax consequences of this redemption?

A) The estate recognizes no gain (or loss) on the redemption.
B) The estate recognizes $700,000 of dividend income on the redemption.
C) Brown Corporation recognizes no gain (or loss) on the distribution of the land.
D) The estate has a basis of $650,000 in the land.
E) None of the above.

Question 73

The adjusted gross estate of Debra, decedent, is $8 million. Debra's estate will incur death taxes and funeral and administration expenses of $1 million. Debra's gross estate includes stock in Silver Corporation that she had purchased twelve years ago for $600,000 (date of death fair market value of $3 million). At the time of her death in 2011, Debra owned 80% of the stock in Silver Corporation. Silver Corporation (E & P of $4 million) redeems all of the estate's stock in the corporation for $3 million. Debra's will names her daughter, Dena, who owns the remaining 20% interest in Silver Corporation, as her sole heir. With respect to this redemption, Debra's estate has the following income:

A) $0.
B) $2.4 million long-term capital gain.
C) $2 million dividend.
D) $1 million dividend.
E) None of the above.

Question 74

Pursuant to a qualifying stock redemption, Redbird Corporation (E & P of $400,000) transfers land held for investment purposes to Bob, a 10% shareholder. On the date of the distribution, Redbird has a basis of $200,000 in the land and its fair market value is $150,000. Bob has a basis of $40,000 in the shares redeemed. With respect to the redemption:

A) Bob will recognize a gain of $110,000.
B) Bob will have $150,000 of dividend income.
C) Bob will have a $200,000 basis in the land.
D) Redbird Corporation will recognize a capital loss of $50,000.
E) None of the above.

Question 75

Two years ago, Emily, the sole shareholder of Tan Corporation (E & P of $600,000), received a nontaxable stock dividend of 100 shares of preferred stock (fair market value of $100,000) from Tan. As a result of the stock dividend, Emily properly allocated $30,000 of her common stock basis to the preferred stock. One year ago, Emily made a gift of the preferred stock in Tan Corporation to her son, Matt. In the current year, Matt sells one-half of the shares of preferred stock to Betty, an unrelated party, for $50,000. With respect to the sale of the preferred stock by Matt:

A) Matt will recognize ordinary income of $0.
B) Matt will recognize ordinary income of $35,000.
C) Matt will recognize ordinary income of $50,000.
D) Matt will recognize a capital gain of $35,000.
E) None of the above.

Question 76

Connie sold 200 shares of § 306 stock (basis of $10,000) in Blackbird Corporation to Larry (an unrelated individual) for $30,000. When the § 306 stock was issued to Connie, the stock had a value of $30,000, and Blackbird had E & P of $500,000. At the time the § 306 stock is sold, Blackbird's E & P is $550,000. At the time of the sale, Connie owned 750 shares of common stock (basis of $65,000) in Blackbird. With respect to the sale of the § 306 stock by Connie:

A) Connie has a $30,000 capital gain.
B) Blackbird Corporation reduces its E & P by $30,000.
C) Connie has a $20,000 capital gain.
D) Connie has a $75,000 basis in the common stock.
E) None of the above.

Question 77

The stock in Tangerine Corporation is held by two unrelated individuals, Janet (60%) and Joaquin (40%). One year before the liquidation of Tangerine, the shareholders transfer properties to the corporation in a transaction that qualifies under § 351. Included in that transfer was land (basis of $600,000, fair market value of $650,000). Pursuant to its liquidation in the current year, Tangerine Corporation distributes the land (now worth $500,000) pro rata to the shareholders. What amount of loss will Tangerine recognize on the distribution?

A) $0.
B) $40,000.
C) $60,000.
D) $100,000.
E) None of the above.

Question 78

Purple Corporation has two equal shareholders, Joshua and Ellie, who are father and daughter. One year ago, the two shareholders transferred properties to Purple in a § 351 exchange. Joshua transferred land (basis of $400,000, fair market value of $350,000) and securities (basis of $20,000, fair market value of $80,000), while Ellie transferred equipment (basis of $220,000, fair market value of $430,000). In the current year, Purple Corporation adopts a plan of liquidation, sells all of its assets, and distributes the proceeds pro rata to Joshua and Ellie. The only loss realized upon disposition of the properties was with respect to the undeveloped land that had decreased in value to $290,000 and was sold for this amount. Purple never used the land for any business purpose during the time it was owned by the corporation. What amount of loss can Purple Corporation recognize on the sale of the land?

A) $0.
B) $50,000.
C) $60,000.
D) $110,000.
E) None of the above.

Question 79

Joe owns 100% of Green Corporation (E & P of $500,000) and 100% of Navy Corporation (E & P of $400,000). Joe sells 100 shares in Green (basis of $40,000) to Navy for $70,000, its fair market value. Joe purchased the stock in Green six years ago. Joe has:

A) Dividend income of $30,000.
B) Dividend income of $70,000.
C) A long-term capital gain of $30,000.
D) A long-term capital gain of $70,000.
E) None of the above.

Question 80

Pursuant to a complete liquidation, Woodpecker Corporation distributes the following assets to its unrelated shareholders: land held for six years as an investment (basis of $100,000, fair market value of $300,000), inventory (basis of $100,000, fair market value of $140,000), and marketable securities held for two years as an investment (basis of $200,000, fair market value of $120,000). What are the tax results to Woodpecker Corporation as a result of the liquidation?

A) Woodpecker Corporation would recognize ordinary income of $40,000 and a net capital gain of $200,000.
B) Woodpecker Corporation would recognize ordinary income of $40,000 and a net capital gain of $120,000.
C) Woodpecker Corporation would recognize ordinary income of $40,000 and a net capital loss of $80,000.
D) Woodpecker Corporation would recognize no gain or loss on the liquidation.
E) None of the above.