Question 1

A shareholder's basis in property acquired in a stock redemption is the property's fair market value as of the date of redemption.

Accepted Answer

According to IRS regulations, the basis for property acquired in a stock redemption is its fair market value as of the date of redemption. This is because the redemption is treated as a sale of the shareholder's stock, and the basis for the property received in the redemption is determined under the general rules for determining basis in property received in exchange for stock.

Question 2

Tan Corporation paid interest expense on a debt incurred in financing a redemption of its stock. The interest expense is not deductible since it was incurred in connection with a stock redemption.

Accepted Answer

Interest expense incurred in connection with a stock redemption is generally deductible as a business expense. However, certain conditions and limitations may apply depending on the specific circumstances of the transaction.

Question 3

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

Since Reginald's stock interest was entirely redeemed, he no longer has an ownership interest in Robin Corporation. Therefore, his loan to the corporation does not constitute a prohibited interest and is allowed under the family attribution waiver.

Question 4

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. 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

The redemption of $1.2 million of Heron stock from the estate to pay death taxes qualifies under § 303 as long as the value of the redeemed stock does not exceed the amount of the estate tax and expenses. In this case, the total estate tax and expenses are $1.2 million, which is equal to the amount of Heron stock being redeemed. Therefore, the transaction qualifies under § 303 and will receive sale or exchange treatment.

Question 5

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...

Question 6

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 7

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

Accepted Answer

This is because a stock redemption is treated as a sale or exchange of stock, which can trigger capital gains taxes for the shareholder. In contrast, dividends are taxed at a lower rate as long-term capital gains, and some dividends may also qualify for preferential tax treatment.

Question 8

At the time of her death, Janice owned (in terms of the value of the stock outstanding) the following stock: 18% of Dove 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 Dove and Hawk stocks are aggregated.

Accepted Answer

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

Question 9

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 $300,000 as a result of the distribution.

Accepted Answer

In a disproportionate redemption, the distribution is treated as a sale or exchange, not as a dividend, so the E & P is not reduced by the distribution amount. Instead, the E & P would be adjusted based on the gain or loss recognized by the shareholder on the sale or exchange, not the distribution amount itself.

Question 10

In applying the § 318 stock attribution rules to a stock redemption, a shareholder is treated as owning the stock of her spouse, children, grandchildren, parents, and siblings.

Accepted Answer

The answer of In applying the § 318 stock attribution...

Question 11

Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year.

Federal income taxes paid	$110,000
Net operating loss carryforward deducted currently	70,000
Gain recognized this year on an installment sale from a prior year	44,000
Depreciation deducted on tax return (ADS depreciation would have been $10,000)	40,000
Interest income on Iowa state bonds	8,000
Rose Corporation’s current E & P is:

Accepted Answer

Starting with taxable income of $300,000 and subtracting the following:

- Federal income taxes paid of $110,000
- Net operating loss carryforward deducted currently of $70,000
- Depreciation deducted on tax return of $40,000 (since ADS depreciation would have been $10,000, there's a $30,000 difference that reduces taxable income)
- Gain recognized this year on an installment sale from a prior year of $44,000

This leaves Rose Corporation with $36,000 of taxable income. However, we also need to add back in the interest income on Iowa state bonds, which is not included in taxable income. Therefore, current E&P is $254,000 ($300,000 - $110,000 - $70,000 - $30,000 + $8,000 = $98,000 + $156,000 = $254,000).

Question 12

For purposes of the waiver of the family attribution rules in a complete termination redemption, the former shareholder must notify the IRS within 30 days of acquiring a prohibited interest in the corporation during the 10- year period following the redemption.

Accepted Answer

This statement is true. According to IRS rules, if a former shareholder acquires a prohibited interest in a corporation within 10 years following a complete termination redemption, they must notify the IRS within 30 days and seek a waiver of the family attribution rules. Failure to do so can result in the IRS disregarding the redemption and treating the transaction as a dividend distribution.

Question 13

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 14

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 $210,000 as a result of the distribution.

Accepted Answer

The answer of Grackle Corporation (E & P of $600,000)...

Question 15

A redemption will qualify as a not essentially equivalent redemption only if the shareholder's interest in the redeeming corporation has been meaningfully reduced.

Accepted Answer

A not essentially equivalent redemption requires a meaningful reduction in the shareholder's interest in the corporation. This means that the shareholder must have a significantly lower ownership percentage or a different type of ownership interest after the redemption.

Question 16

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

The redemption price of $100,000 minus Paul's basis of $30,000 results in a long-term capital gain of $70,000.

Question 17

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 18

As a result of a redemption, a shareholder's interest (direct and indirect) in the corporation decreased from 80% to 55%. The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

Accepted Answer

For a redemption to qualify as disproportionate, the shareholder's interest must fall below 50% of the total combined voting power of all classes of stock entitled to vote or below 50% of the total number of shares of all other classes of stock after the redemption. In this case, decreasing from 80% to 55% does not meet this requirement.

Question 19

In general, if a shareholder's ownership interest is not diminished as a result of a stock redemption, the Code will treat the transaction as a sale or exchange.

Accepted Answer

If a shareholder's ownership interest is not diminished as a result of a stock redemption, the transaction will be treated as a distribution under the Code, not a sale or exchange. This is because the shareholder has not given up any ownership in the company, but rather received a payment in exchange for their shares.

Question 20

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...

Quiz 19: Corporations: Distributions Not in Complete Liquidation