Deck 4: Corporate Distributions: Stock Redemptions and Partial Liquidations

Question 1

Clothing Inc.and Mr.Red Button formed Apparel Corp.in 1960.It is engaged in the manufacture and sale of shirts and ties.Apparel acquired the tie business from Silk Inc.Now it desires to get out of the tie business but continue in the shirt business.The primary assets of the tie business are: $\begin{array} { l }\text { Assets }&\text { Adiusted Basis }&\text { Fair Market Value }\\\text { Plant }&\$60,000&\$200,000\\\text { Equipment }&20,000&45,000\\\text { Truck }&15,000&8,000\end{array}$
Assume all necessary requirements are satisfied unless otherwise stated or implied.
Both of the shareholders of Apparel are assured of sale treatment assuming they exchange a portion of their stock in exchange for the proceeds from the sale of the tie business.

Answer 1

False

Question 2

Ed has decided to retire and completely terminate his interest in his closely held business.Currently, he owns 60 percent of the corporation while his son owns the remaining 40 percent.His son received his 40 percent over 20 years ago as a gift from his father.Ed will not be able to secure exchange treatment for a redemption of his stock because he will be treated as owning all of the stock of his son.

Answer 2

False

Question 3

Clothing Inc.and Mr.Red Button formed Apparel Corp.in 1960.It is engaged in the manufacture and sale of shirts and ties.Apparel acquired the tie business from Silk Inc.Now it desires to get out of the tie business but continue in the shirt business.The primary assets of the tie business are: $\begin{array} { l }\text { Assets }&\text { Adiusted Basis }&\text { Fair Market Value }\\\text { Plant }&\$60,000&\$200,000\\\text { Equipment }&20,000&45,000\\\text { Truck }&15,000&8,000\end{array}$
Assume all necessary requirements are satisfied unless otherwise stated or implied.
Sale treatment is assured for some shareholders if the tie business has been operated by Apparel for three years and Silk for three years.

Answer 3

True

Question 4

Baxter died this year with a gross estate of $2,000,000, consisting primarily of stock in his family-owned corporation.A redemption of the estate's stock will not qualify if Baxter's interest in the corporation which is included in his estate is 8 percent.

Question 5

During the year, Mr.T redeemed 20 shares of the stock of D Corporation for $15,000.The basis of the shares redeemed was $8,000.Assuming the redemption does not qualify for sale treatment, Mr.T will have a dividend of $7,000.

Question 6

Mr.S owns 40 percent of R Corporation and 60 percent of T Corporation.T owns 30 percent of R.Under the constructive ownership rules of § 318, T Corporation is treated as owning 54 percent of R.

Question 7

Mr.Y owns 40 percent of R Corporation and 20 percent of the Y&T Partnership.Y&T owns 30 percent of R.Under the constructive ownership rules of § 318, Mr.Y is treated as owning 46 percent of R.

Question 8

Hedi and her daughter own all of the stock of C Corporation equally.This year Hedi died, leaving all of her stock to her daughter.Her gross estate was $700,000, consisting primarily of C stock.Funeral and administrative expenses were $20,000.Other claims against the estate were $60,000.A redemption of the estate's stock will qualify for exchange treatment, at least in part, if Hedi's interest in the corporation which is included in her estate is valued at not less than $238,001.

Question 9

M owns 60 percent of B Corporation and 40 percent of C Corporation.C Corporation owns 20 percent of B Corporation.Under the constructive ownership rules of § 318, M is treated as owning 60 percent of B.

Question 10

Mr.Smooth owns directly 70 percent of the stock of Mellow Corporation and 60 percent of the stock of Calm Corporation.Mellow owns 30 percent of Calm.During the year, Calm redeemed all 60 percent of Mr.Smooth's stock.Mr.Smooth may waive the constructive ownership rules and secure sale treatment for the redemption.

Question 11

Under the constructive ownership rules of § 318 an individual is considered to own the stock owned by his or her spouse and other family members, including parents, brothers, sisters, children, and grandchildren.

Question 12

K owns 40 of the 100 shares outstanding of L Corporation.The remaining shares are owned by unrelated individuals.Assuming L redeems 10 shares of K's stock, the redemption will be treated as a dividend under the safe harbor tests.

Question 13

M owns 60 percent of B Corporation and 40 percent of C Corporation.C Corporation owns 20 percent of B Corporation.Under the constructive ownership rules of § 318, C Corporation is treated as owning 80 percent of B.

Question 14

In determining whether a redemption distribution qualifies for sale treatment under the facts and circumstances tests of § 302, one factor typically considered is whether the redemption was motivated by a valid business purpose.

Question 15

Mr.S owns 40 percent of R Corporation and 60 percent of T Corporation.T owns 30 percent of R.Under the constructive ownership rules of § 318, Mr.S is treated as owning 58 percent of R.

Question 16

Clothing Inc.and Mr.Red Button formed Apparel Corp.in 1960.It is engaged in the manufacture and sale of shirts and ties.Apparel acquired the tie business from Silk Inc.Now it desires to get out of the tie business but continue in the shirt business.The primary assets of the tie business are: $\begin{array} { l }\text { Assets }&\text { Adiusted Basis }&\text { Fair Market Value }\\\text { Plant }&\$60,000&\$200,000\\\text { Equipment }&20,000&45,000\\\text { Truck }&15,000&8,000\end{array}$
Assume all necessary requirements are satisfied unless otherwise stated or implied.
Sale treatment is assured for some shareholders if the tie business was acquired in a nontaxable merger three years ago.

Question 17

Mr.Y owns 40 percent of R Corporation and 20 percent of the Y&T Partnership.Y&T owns 30 percent of R.Under the constructive ownership rules of § 318, Y&T is treated as owning 30 percent of R.

Question 18

Clothing Inc.and Mr.Red Button formed Apparel Corp.in 1960.It is engaged in the manufacture and sale of shirts and ties.Apparel acquired the tie business from Silk Inc.Now it desires to get out of the tie business but continue in the shirt business.The primary assets of the tie business are: $\begin{array} { l }\text { Assets }&\text { Adiusted Basis }&\text { Fair Market Value }\\\text { Plant }&\$60,000&\$200,000\\\text { Equipment }&20,000&45,000\\\text { Truck }&15,000&8,000\end{array}$
Assume all necessary requirements are satisfied unless otherwise stated or implied.
Apparel generally will recognize gain but not loss on the sale of the tie assets assuming the proceeds are promptly distributed.

Question 19

Corporate taxpayers favor sale treatment in stock redemptions as opposed to dividend treatment.

Question 20

M Corporation has 100 shares of outstanding stock, all of which are owned by B.Assuming M Corporation redeems 70 of B's shares, the redemption does not qualify for exchange treatment.

Question 21

T, the sole shareholder of R Corporation, wants to retire.To this end, he sold all of his stock in R to X Corporation, which is a wholly owned corporation of his son.T is assured of exchange treatment on the sale.

Question 22

If a redemption fails to qualify for sale treatment, the full amount received by the shareholder for the stock

A)Qualifies for exchange treatment
B)Qualifies for exchange treatment after deducting the stock's basis
C)Qualifies as a property distribution after deducting the stock's basis, and thus is a dividend to the extent that it is out of E&P
D)Qualifies as a property distribution and thus is a dividend to the extent that it is out of E&P

Question 23

B owns 30 shares of MNO Corporation preferred stock that he received as a nontaxable stock dividend two years ago when the corporation had a deficit of $7,000 in E&P.Currently, MNO has substantial E&P.Assuming B sold the preferred stock to an unrelated third party, he is assured of sale treatment.

Question 24

T redeems her § 306 stock.The amount realized is treated as a dividend to the extent that T would have a dividend if at the time of the distribution cash had been distributed in lieu of stock.

Question 25

T owns all shares of outstanding common stock of W Corporation.V Corporation and W agree to a merger whereby V will absorb W.T receives common and preferred stock in V, and her stock in W is canceled.T's receipt of the preferred stock has the same effect as a nontaxable stock dividend.

Question 26

Clothing Inc.and Mr.Red Button formed Apparel Corp.in 1960.It is engaged in the manufacture and sale of shirts and ties.Apparel acquired the tie business from Silk Inc.Now it desires to get out of the tie business but continue in the shirt business.The primary assets of the tie business are: $\begin{array} { l }\text { Assets }&\text { Adiusted Basis }&\text { Fair Market Value }\\\text { Plant }&\$60,000&\$200,000\\\text { Equipment }&20,000&45,000\\\text { Truck }&15,000&8,000\end{array}$
Assume all necessary requirements are satisfied unless otherwise stated or implied.
Assume Apparel purchased the tie business from Silk four years ago for $250,000 cash.A pro rata distribution attributable to a sale of the tie business should qualify for sale treatment under the meaningful reduction test.

Question 27

Clothing Inc.and Mr.Red Button formed Apparel Corp.in 1960.It is engaged in the manufacture and sale of shirts and ties.Apparel acquired the tie business from Silk Inc.Now it desires to get out of the tie business but continue in the shirt business.The primary assets of the tie business are: $\begin{array} { l }\text { Assets }&\text { Adiusted Basis }&\text { Fair Market Value }\\\text { Plant }&\$60,000&\$200,000\\\text { Equipment }&20,000&45,000\\\text { Truck }&15,000&8,000\end{array}$
Assume all necessary requirements are satisfied unless otherwise stated or implied.
Assuming that Apparel distributed the assets of the tie business in redemption of all of the stock of Red Button, Apparel would recognize a gain of $165,000 and a loss of $7,000.

Question 28

The 100 shares of Yankee Corporation were owned as shown below: $$\begin{array} { l c } \text { Shareholder } & \text { Shares } \\\text { George } & 10 \\\text { Bucky } & 20 \\\text { G\&D Partnership } & 40 \\\text { Stein Corporation } & 30\end{array}$$ George and Bucky are unrelated.George is a 50 percent partner in the G&D partnership.In addition, George owns 70 percent of Stein Corporation.Stein Corporation plans to redeem some of its stock in Yankee.What is Stein Corporation's direct and indirect interest in Yankee before the redemption?

A)37 percent
B)40 percent
C)51 percent
D)60 percent
E)None of the above

Question 29

C, an individual, owns 80 of the 100 shares of T Corporation stock outstanding while the remaining shares are owned by unrelated parties.T's basis in the 80 shares is $1,600, or $20 per share.This year T redeemed 10 shares of C for $4,000.Assuming the redemption does not qualify for sale treatment and T has substantial E&P, C's dividend income and basis in his remaining shares will be

A)A dividend of $4,000 and a basis of $1,600
B)A dividend of $3,800 and a basis of $1,400
C)A dividend of $4,000 and a basis of $ 1,400
D)A dividend of $3,800 and a basis of $1,600
E)None of the above

Question 30

Nickel & Dime Corporation has 100 shares of stock outstanding owned by the following taxpayers. $\begin{array} { l }\text { Shareholder }&\text { Shares Owned }\\\text { Mr. Nickel }&50\\\text { Mrs. Nickel (Mr. Nickel's wife) }&10\\\text { Brian (the Nickels' son) }&10\\\text { Lisa (the Nickels' daughter) }&10\\\text { N\&N Partnership (Mr. Nickel is a } 20 \% \text { partner) }&10\\\text { NNN Corporation (Mr. Nickel is a } 60 \% \text { shareholder) }&10\\&100\end{array}$
Brian Nickel has decided to sell some of his shares back to the corporation in order to pay for his college tuition.Other than Brian's father, none of Brian's relatives nor the partnership or corporations are partners in N&N or shareholders in NNN.Under the constructive ownership rules of § 318, what percentage of Nickel Corporation does Brian Nickel own?

A)70 percent
B)72 percent
C)78 percent
D)80 percent
E)82 percent

Question 31

Clothing Inc.and Mr.Red Button formed Apparel Corp.in 1960.It is engaged in the manufacture and sale of shirts and ties.Apparel acquired the tie business from Silk Inc.Now it desires to get out of the tie business but continue in the shirt business.The primary assets of the tie business are: $\begin{array} { l }\text { Assets }&\text { Adiusted Basis }&\text { Fair Market Value }\\\text { Plant }&\$60,000&\$200,000\\\text { Equipment }&20,000&45,000\\\text { Truck }&15,000&8,000\end{array}$
Assume all necessary requirements are satisfied unless otherwise stated or implied.
This year Red Button and Clothing had a disagreement on the direction of the company.Consequently, Red has decided that he would like to take the tie business and go his separate way.The most logical form that this transaction should take is a partial liquidation.

Question 32

The 100 shares of outstanding stock of Flash Corporation are owned by Barbara and Kelly, 70 and 30 shares respectively.Neither shareholder is related to the other.Each has a basis in her stock of $200 per share.During the year, Barbara sold 35 of her shares back to the corporation for $20,000.Assuming the corporation has substantial earnings and profits, Barbara's A.G.I.will increase by

A)A dividend of $20,000
B)A capital gain of $ 13,000
C)A dividend of $13,000
D)A capital gain of $20,000
E)None of the above

Question 33

T Corporation manufactures handbags and belts.The belt business was acquired from S, who established the business in her home three years ago.S contributed the business to T in a nontaxable transaction under § 351.The handbag business has been operated by T since 1970.Assuming T sells the belt business and distributes the proceeds, the distribution qualifies for partial liquidation treatment.

Question 34

Which of the following is not a "relative" under the constructive ownership rules?

A)A 60 percent owned corporation
B)A sister
C)A partnership in which the taxpayer owns 20 percent
D)A trust of which taxpayer is the sole beneficiary
E)All of the above are considered relatives.

Question 35

In order for a redemption or partial liquidation to qualify for exchange treatment, the distribution must not be essentially equivalent to a dividend.The approach used by the governing provisions in determining dividend equivalency is the same whether the transaction is a redemption or partial liquidation.

Question 36

A distribution in partial liquidation is not considered equivalent to a dividend if it is attributable to a genuine contraction of the corporation's business.

Question 37

F Corporation has 100 shares of outstanding stock, all owned by J.J bought the shares 10 years ago for $20,000, or $200 per share.During the year, the corporation redeemed 10 shares of J's stock for $30,000.Which of the following is true?

A)J must report a capital gain of $28,000.
B)J must report a capital gain of $10,000.
C)J must report dividend income of $28,000.
D)J must report dividend income of $30,000.

Question 38

Twelve years ago, F persuaded his daughter to join in the family business by giving her 40 percent of the stock.He has retained the remaining 60 percent until now to ensure control.F now wishes to turn the business over to his daughter.A redemption of all of F's shares can qualify for capital gain or loss treatment.

Question 39

The 100 shares of outstanding stock of Majestic Corporation are owned by Jim and Bob, 40 and 60 shares respectively.Neither shareholder is related to the other.Each has a basis in his stock of $100 per share.During the year, Jim sold 10 of his shares back to the corporation for $10,000.Assuming the corporation has substantial earnings and profits, Jim's A.G.I.will increase by

A)A capital gain of $ 10,000
B)A dividend of $10,000
C)A capital gain of $9,000
D)A dividend of $9,000
E)None of the above

Question 40

S owns 60 percent of the 100 shares of LMN, Inc.stock outstanding.His dad owns 20 shares, and his friend J owns the remaining 20 shares.S also owns 50 percent of OPQ's 100 shares outstanding while J owns the other 50 percent.Assuming S sells 40 shares of LMN to OPQ for a gain of $5,000, he is assured of exchange treatment.

Question 41

Under § 303, concerning redemptions to pay death taxes, which of the following conditions must be satisfied in order to qualify for sale treatment?

A)The value of the redeeming corporation's stock must be more than 50 percent of the adjusted gross estate.
B)The shareholder's interest in the corporation that is included in his or her gross estate must be at least 20 percent.
C)The estate must be subject to some type of federal, state or local estate, inheritance or other death tax.
D)More than one of the above are true.
E)None of the above are true.

Question 42

R, an individual, owns 50 percent of the stock of P Corporation and 30 percent of the stock of Y Corporation.The remaining 70 percent of Y's stock is owned by P Corporation.Because of his stock ownership in P, R is considered as owning

A)80 percent of Y
B)75 percent of Y
C)65 percent of Y
D)none of Y

Question 43

Zap Corporation has 200 shares of outstanding stock, which are owned by three unrelated individuals as follows: Q owns 120 shares, R owns 60 shares, and S owns 20 shares.During the year, Zap redeemed 30 shares from Q for $36,000.Zap had E&P before the redemption of $35,000.The E&P of Zap will decrease by

A)$36,000
B)$5,250
C)$8,750
D)$35,000
E)None of the above

Question 44

J died this year.His sole asset was 80 shares of D Corporation stock, which were worth $800,000 (basis $200 per share).The remaining 20 shares of the stock were owned by J's son.In J's will, he provided that all of the stock go to his son.Estate taxes were $123,000, and funeral and administrative expenses were $27,000.In order to pay the death taxes, the corporation redeemed 20 shares of stock from J's estate for $200,000.Assuming the corporation has substantial E&P, the estate will report

A)No gain or loss or other income from the redemption distribution
B)$196,000 capital gain
C)$ 150,000 capital gain and $50,000 dividend
D)$50,000 dividend
E)None of the above

Question 45

For many years, Howdy and his son, Doody, owned and operated Buffalo Corporation.Howdy owned 1,000 shares of the corporation while the remaining 400 shares outstanding were owned by Doody.Howdy had a basis in the stock before he died of $20,000.On June 1 of this year, Howdy died.Howdy's gross estate of $1,500,000 was comprised of various assets, including stock in Buffalo.Deductions for funeral and administrative expenses were $10,000 and Federal and state death taxes were $200,000.Of the remainder, $100,000 was left as a charitable contribution to the United Way and the balance, including the stock, was transferred to Howdy's sole heir, Doody.In order to pay off the death taxes and other expenses, Howdy's estate sold some of the stock back to the corporation.The maximum amount of stock that the estate may exchange that would qualify for sale treatment is

A)Whatever the value of the stock is that is included in the gross estate
B)$310,000
C)$210,000
D)$200,000
E)Some other amount

Question 46

For many years, Howdy and his son, Doody, owned and operated Buffalo Corporation.Howdy owned 1,000 shares of the corporation while the remaining 400 shares outstanding were owned by Doody.Howdy had a basis of $20,000 in the stock before he died.On June 1 of this year, Howdy died.Howdy's gross estate of $1,500,000 was comprised of various assets, including stock in Buffalo.Deductions for funeral and administrative expenses were $10,000 and Federal and state death taxes were $200,000.Of the remainder, $100,000 was left as a charitable contribution to the United Way and the balance, including the stock, was transferred to Howdy's sole heir, Doody.In order to pay off the death taxes and other expenses, Howdy's estate sold some of the stock back to the corporation.In order for the estate's exchange to qualify for sale treatment, the lowest value that can be placed on the estate's 1,000 shares is

A)$525,001
B)$451,501
C)$455,001
D)$300,001
E)Some other amount

Question 47

During the year, Hickory Corporation distributed land worth $40,000 (basis $7,000) and equipment worth $10,000 (basis $15,000) to one of its shareholders, R.Due to the distributions, the corporation will report

A)Net income of $28,000 if the distributions are treated as a dividend out of Maple's E&P
B)Net income of $33,000 if the distributions qualify for sale treatment under the basic redemption rules of 302
C)No gain or loss if the distribution qualifies for sale treatment under the partial liquidation rules
D)None of the above answers is correct.

Question 48

Mr.R owns 60 of the 100 outstanding shares of B Corporation while the remaining shares are owned by unrelated parties.He also owns 80 of the 100 outstanding shares of S Corporation.During the year, R sold 40 shares of B to S for $30,000.In applying the rules governing redemptions through related corporations, the critical pre- and post-redemption ownership interests are:

A)80 percent and 40 percent
B)60 percent and 52 percent
C)80 percent and 52 percent
D)60 percent and 40 percent
E)Some other percentages

Question 49

TU Unlimited, Inc.has been in the hot tub and spa business since 1970.Several years ago it decided it should get into the patio enclosure business because many customers were purchasing tubs and then enclosing them on their patio.Three years ago, the company acquired the franchise from a local proprietor for $100,000 to allow it to sell prefabricated enclosures manufactured by another corporation specializing in this type of activity.The proprietor had six years of experience in the business.The enclosure business has had incredible growth, and this year the company decided to get out of the hot tub business.It sold all of the assets of the hot tub business and distributed the proceeds pro rata to its shareholders in redemption of 5 percent of their stock.The distribution will

A)Qualify for sale treatment for both corporate and noncorporate shareholders alike
B)Qualify for sale treatment for only noncorporate shareholders
C)Not qualify for sale treatment for any shareholders
D)Qualify for sale treatment for only corporate shareholders

Question 50

SSS Corporation has 200 shares of outstanding stock, which are owned by three unrelated individuals as follows: A owns 120 shares, B owns 60 shares, and C owns 20 shares.During the year SSS redeemed 50 percent of A's shares for $60,000.SSS had E&P before the redemption of $100,000.The E&P of SSS will decrease by

A)$50,000
B)$60,000
C)$20,000
D)$30,000
E)None of the above

Question 51

TH Inc.has been in the storage business for 10 years.Prior to a stock redemption, TH has 100 shares of stock outstanding.The stock owned and the number of shares redeemed from each shareholder are as follows: $\begin{array} { l }\text { Name }&\text { Shares Owned before Redemption }&\text { Adrusted Basis }\\\text { L3 } & \$ 4,000 \\\text { E12 } & 3,000\\D&60&6,000\\G&5&1,000\\\text { MMM Corp. }&20&2,000\\100\end{array}$
L is E's mother and D owns 40 percent of MMM Corp; otherwise the parties are unrelated.TH has $100,000 in accumulated and current earnings and profits.All of the parties have owned their stock since the inception of the corporation.If in an independent transaction TH distributes a warehouse used in the storage business worth $10,000 (basis $8,000) and land worth $15,000 (basis $20,000) in redemption of stock,

A)No gain or loss will be recognized.
B)A $2,000 gain will be recognized.
C)A $2,000 gain and a $5,000 loss will be recognized.
D)None of the above are true.

Question 52

For many years, Howdy and his son, Doody, owned and operated Buffalo Corporation.Howdy owned 1,000 shares of the corporation while the remaining 400 shares outstanding were owned by Doody.Howdy had a basis in the stock before he died of $20,000.On June 1 of this year, Howdy died.Howdy's gross estate of $1,500,000 was comprised of various assets, including stock in Buffalo.Deductions for funeral and administrative expenses were $10,000 and Federal and state death taxes were $200,000.Of the remainder, $100,000 was left as a charitable contribution to the United Way and the balance, including the stock, was transferred to Howdy's sole heir, Doody.In order to pay off the death taxes and other expenses, Howdy's estate sold some of the stock back to the corporation.If the corporation distributed property in exchange for the estate's shares:

A)Any increase or decrease in value on property used to redeem the stock would escape tax because the property got a step-up or step-down in basis at death.
B)Under current law, the corporation would recognize no gain or loss on the distribution based on the General Utilities doctrine.
C)The corporation must recognize gain and loss on the distribution of property in a redemption that meets the requirements of § 303 relating to redemptions to pay death taxes.
D)The corporation must recognize gain, but not loss, on the distribution.
E)More than one of the above are true.

Question 53

SOS Corporation has 200 shares of outstanding stock (one class of voting common), which are owned by three unrelated individuals as follows: A owns 120 shares, B owns 60 shares, and C owns 20 shares.During the year, SOS has redeemed a portion of A's shares for $20,000.In order for the redemption to qualify for sale treatment the lowest number of shares that SOS must redeem must exceed

A)20
B)24
C)46
D)60
E)None of the above

Question 54

T owns all of the stock of both B and S Corporations.T, desiring to bail E&P out of B Corporation, sold stock of B with a basis of $16,000 to S for $50,000.Unfortunately, the sale did not qualify for sale treatment due to the special provisions of § 304 concerning redemptions by related corporations.Assuming B has E&P of $40,000 and S has a deficit in E&P of ($25,000), T will report a dividend of

A)$50,000
B)$34,000
C)$40,000
D)$15,000
E)None of the above

Question 55

Which of the following redemptions normally will not qualify for sale treatment?

A)A partial liquidation with the stock redeemed from a corporate shareholder
B)A redemption from an estate to provide cash to pay death taxes
C)A redemption that reduces taxpayer ownership from 30 percent to 20 percent
D)A redemption of all the stock that the taxpayer owns

Question 56

TH Inc.has been in the storage business for 10 years.Prior to a stock redemption, TH has 100 shares of stock outstanding.The stock owned and the number of shares redeemed from each shareholder are as follows: $\begin{array} { l }\text { Name }&\text { Shares Owned before Redemption }&\text { Adrusted Basis }\\\text { L3 } & \$ 4,000 \\\text { E12 } & 3,000\\D&60&6,000\\G&5&1,000\\\text { MMM Corp. }&20&2,000\\100\end{array}$
L is E's mother and D owns 40 percent of MMM Corp; otherwise the parties are unrelated.TH has $100,000 in accumulated and current earnings and profits.All of the parties have owned their stock since the inception of the corporation.During the year TH redeemed 25 shares of D's stock for $30,000.D's gain is

A)$30,000 dividend
B)$27,500 dividend
C)$30,000 capital gain
D)$27,500 capital gain
E)None of the above

Question 57

During the year, Oak Corporation distributed land worth $100,000 (basis $20,000) to one of its shareholders, T.The corporation will recognize gain if the distribution

A)Is treated as a dividend out of Oak's E&P
B)Qualifies for sale treatment under the basic redemption rules of § 302
C)Qualifies for sale treatment under the partial liquidation rules
D)More than one of the above answers is correct.
E)All of the above answers are correct.

Question 58

Technically, § 302(b)(4) grants sale treatment only when the redemption distribution is to a noncorporate shareholder and is in partial liquidation of the distributing corporation.A distribution is likely to be considered in partial liquidation if

A)It is essentially equivalent to a dividend.
B)It is due to the termination of one of two or more "qualified" businesses.
C)It follows the death of the major shareholder.
D)None of the above

Question 59

During the year, Maple Corporation distributed land worth $10,000 (basis $15,000) to one of its shareholders, R.The corporation will recognize loss if the distribution

A)Is treated as a dividend out of Maple's E&P
B)Qualifies for sale treatment under the basic redemption rules of § 302
C)Qualifies for sale treatment under the partial liquidation rules
D)More than one of the above answers is correct.
E)None of the above answers is correct.

Question 60

TH Inc.has been in the storage business for 10 years.Prior to a stock redemption, TH has 100 shares of stock outstanding.The stock owned and the number of shares redeemed from each shareholder are as follows: $\begin{array} { l }\text { Name }&\text { Shares Owned before Redemption }&\text { Adrusted Basis }\\\text { L3 } & \$ 4,000 \\\text { E12 } & 3,000\\D&60&6,000\\G&5&1,000\\\text { MMM Corp. }&20&2,000\\100\end{array}$
L is E's mother and D owns 40 percent of MMM Corp; otherwise the parties are unrelated.TH has $100,000 in accumulated and current earnings and profits.All of the parties have owned their stock since the inception of the corporation.Assuming that TH redeemed all of G's stock for $8,000, its E&P will

A)Decrease by $8,000
B)Decrease by $5,000
C)Neither increase nor decrease
D)Decrease by $4,000
E)None of the above

Question 61

In 20X5, R received 20 shares of preferred stock as a distribution with respect to his XYZ common.The preferred was worth $10,000 and R assigned a basis of $6,000 to it.At the time of distribution, the corporation had substantial earnings and profits.XYZ redeemed R's preferred stock for $13,000 this year when its earnings and profits were $8,000.R will report

A)Capital gain of $7,000, and his basis for common will be unaffected.
B)Dividend income of $7,000, and his basis for common will increase.
C)Dividend income of $8,000, and his basis for common will increase.
D)Dividend income of $7,000, and his basis for common will be unaffected.
E)None of the above

Question 62

On June 1 of this year, R Corporation redeemed 200 of its 1,000 shares of common stock outstanding for $300,000.R's E&P immediately before the redemption was $500,000.Due to the redemption, R's E&P will decrease by

A)$300,000
B)$60,000
C)$100,000
D)$200,000
E)None of the above