Question 1

Identify which of the following statements is true.
A) The Sec. 318 family attribution rules can be waived for purposes of the Sec. 302(b)(3) complete termination rules even though the redeeming shareholder is a creditor of the corporation.
B) Waiver of the Sec. 318 family attribution rules is permitted for all related party stock transactions.
C) For a redemption to be essentially equivalent to a dividend, the shareholder must not have control of the corporation immediately following the redemption.
D) All of the above are false.

Accepted Answer

The answer of Identify which of the following statements is...

Question 2

A partial liquidation of a corporation is treated as a dividend in the case of a corporate shareholder.

Accepted Answer

A partial liquidation is a distribution to shareholders and is considered a dividend for corporate shareholders. This means it is subject to taxation as such.

Question 3

A stock redemption is always treated as if the shareholder sold his stock to the corporation.

Accepted Answer

A stock redemption can be treated either as a sale or exchange transaction where capital gains tax applies, or as a dividend distribution depending on the circumstances and specific tax code provisions. The determination depends on factors such as the shareholder's ownership percentage before and after the redemption, and whether certain IRS tests are met.

Question 4

Which of the following is not a condition that permits a stock redemption to be treated as a sale?
A) It provides funds for payment of income taxes.
B) It is not essentially equivalent to a dividend.
C) The redemption is substantially disproportionate.
D) The redemption completely terminates the shareholder's interest.

Accepted Answer

A stock redemption treated as a sale occurs under specific conditions that do not include providing funds for payment of income taxes. Conditions that permit such treatment include not being essentially equivalent to a dividend, being substantially disproportionate, or completely terminating the shareholder's interest.

Question 5

Which of the following requirements must be met for a redemption to be treated as substantially disproportionate?
A) The shareholder must own less than 50% of the outstanding stock (in terms of voting power) after the redemption.
B) After the redemption, the shareholder must own less than 80% of his percentage ownership of voting stock prior to the redemption.
C) After the redemption, the shareholder must own less than 80% of his percentage ownership of common stock (voting and nonvoting) prior to the redemption.
D) All of the above must be met.

Accepted Answer

All of the requirements (A, B, and C) must be met for a redemption to be treated as substantially disproportionate. The purpose of these requirements is to prevent the shareholder from maintaining a controlling interest in the company after the redemption.

Question 6

Identify which of the following statements is true.
A) Generally in a stock redemption, if the shareholder's ownership percentage is substantially reduced, the redemption is treated as a sale.
B) The family attribution rules of Sec. 318 are as inclusive as the family attribution rules of Sec. 267.
C) A 10% shareholder of a corporation is considered to own 10% of any stock that is owned by the corporation under the Sec. 318 attribution rules.
D) All of the above are false.

Accepted Answer

Generally, in a stock redemption, if the shareholder's ownership percentage is substantially reduced, the redemption can indeed be treated as a sale for tax purposes. This allows for capital gains treatment rather than dividend treatment, under certain conditions specified by the IRS.

Question 7

The Sec. 318 family attribution rules can be waived for purposes of the Sec. 302(b)(3) complete termination rules even though the redeeming shareholder is a creditor of the corporation.

Accepted Answer

The Sec. 318 family attribution rules can be waived for purposes of the Sec. 302(b)(3) complete termination rules even if the redeeming shareholder is a creditor of the corporation.

Question 8

Joshua owns 100% of Steeler Corporation's stock. Joshua's basis in the stock is $8,000. Steeler Corporation has E&P of $40,000. If Steeler Corporation redeems 60% of Joshua's stock for $50,000, Joshua must report dividend income of
A) $0.
B) $8,000.
C) $40,000.
D) $50,000.

Accepted Answer

Joshua must report dividend income of $40,000 because the redemption of stock is essentially treated as a distribution from the corporation to the shareholder to the extent of the corporation's Earnings and Profits (E&P). Since Steeler Corporation has E&P of $40,000, and the redemption does not qualify as a sale or exchange, the entire amount up to the E&P is considered dividend income.

Question 9

Bruce receives 20 stock rights in a nontaxable distribution. The stock rights have an FMV of $5,000. The common stock with respect to which the rights are issued has a basis of $4,000 and an FMV of $120,000. Bruce allows the stock rights to lapse. He can deduct a loss of
A) $0.
B) $1,000.
C) $5,000.
D) none of the above

Accepted Answer

When stock rights received in a nontaxable distribution are allowed to lapse, no deduction is allowed for the loss. This is because the basis of the rights, for the purpose of determining loss, is considered to be zero.

Question 10

Elijah owns 20% of Park Corporation's single class of stock. Elijah's basis in the stock is $8,000. Park's E&P is $28,000. If Park redeems all of Elijah's stock for $48,000, Elijah must report dividend income of
A) $0.
B) $28,000.
C) $40,000.
D) $48,000.

Accepted Answer

The answer of Elijah owns 20% of Park Corporation's single...

Question 11

Identify which of the following statements is true.
A) The distributing corporation's E&P must be reduced by the FMV of nontaxable stock rights distributed to shareholders.
B) A stock redemption can be used to withdraw some assets from a corporation prior to a sale of the business.
C) A shareholder can redeem part of his stock and recognize a capital gain if the corporation has only one shareholder.
D) All of the above are false.

Accepted Answer

A stock redemption can indeed be used to withdraw some assets from a corporation prior to a sale of the business. However, option A is false as the distributing corporation's E&P is not reduced by the FMV of nontaxable stock rights distributed to shareholders, and option C is false as a shareholder cannot recognize a capital gain if they redeem part of their stock in a corporation with only one shareholder.

Question 12

Identify which of the following statements is true.
A) Stock ownership attributed to a corporation from one of its shareholders cannot be attributed to another of the corporation's shareholders under the Sec. 318 attribution rules.
B) Under the attribution rules relating to stock redemptions, a person who has an option to purchase stock is considered to own the stock.
C) A stock redemption that qualifies as substantially disproportionate is a safe harbor for capital gain treatment.
D) All of the above are true.

Accepted Answer

All the statements provided are true. A) According to Sec. 318 attribution rules, stock ownership attributed to a corporation from one of its shareholders cannot be attributed to another shareholder, preventing circular attribution. B) Under the attribution rules, options to purchase stock are treated as ownership of the stock itself, which can affect control and constructive ownership determinations. C) A stock redemption that is substantially disproportionate qualifies for capital gain treatment, which is a tax advantage under certain conditions, acting as a safe harbor.

Question 13

What are the consequences of a stock redemption to the distributing corporation?
A) The corporation recognizes a gain or loss as if it had sold the distributed property for its FMV immediately before the redemption.
B) If the redemption is treated as a dividend, E&P is reduced in the same manner as for a regular dividend.
C) If the redemption is treated as a sale, only accumulated earnings and profits is reduced.
D) All of the above are correct.

Accepted Answer

The answer of What are the consequences of a stock...

Question 14

Which of the following is not a reason for a stock redemption?
A) desire by remaining shareholders to retain control
B) desire by shareholders to reduce the corporate tax liability
C) Redemption of shares is a good corporate investment.
D) No outside market exists for the stock.

Accepted Answer

The answer of Which of the following is not a...

Question 15

Family Corporation, a corporation controlled by Buddy's family, redeems all of Buddy's stock. For the redemption to be treated as a sale, which one of the following conditions must be met?
A) Buddy cannot be a creditor of the corporation after the redemption.
B) Buddy cannot be an officer of the corporation after the redemption.
C) Buddy cannot acquire an interest, even by inheritance, for 10 years unless the bequest was made prior to the redemption.
D) Buddy must have purchased the redeemed stock from a person whose stock ownership would be attributed to Buddy.

Accepted Answer

For a stock redemption to be treated as a sale, one of the conditions that must be met is that the shareholder (in this case, Buddy) cannot be an officer of the corporation after the redemption. This is to ensure that the redemption does not allow the shareholder to maintain control or significant influence over the corporation, which would otherwise make the transaction resemble a dividend rather than a sale.

Question 16

Identify which of the following statements is false.
A) A stock redemption is treated as a sale or exchange only if the shareholder's ownership of one particular class of stock is terminated.
B) An individual is not considered to own stock owned by a brother under the family attribution rules of Sec. 318.
C) An individual is considered to own the stock owned by his parents, children, spouse, and grandchildren under the family attribution rules of Sec. 318.
D) A person who has an option to purchase stock is considered to own the stock.

Accepted Answer

A stock redemption is treated as a sale or exchange regardless of whether the shareholder's ownership of one particular class of stock is terminated. The tax treatment depends on the specific circumstances of the redemption, such as whether it is a complete or partial redemption, and whether it is treated as a dividend or a capital gain. The other statements are generally true under the family attribution rules and stock ownership rules.

Question 17

Ace Corporation has a single class of stock outstanding. Alan owns 200 shares of the common stock, which he purchased for $50 per share two years ago. On April 10, of the current year, Ace Corporation distributes to its shareholders one right to purchase a share of common stock at $60 per share for each share of common stock held. At the time of the distribution, the common stock is worth $75 per share, and the rights are worth $15 per right. On September 10, Alan sells 100 rights for $2,000 and exercises the remaining 100 rights. He sells 60 of the shares acquired with the rights for $80 each on November 10.
a) What is the amount and character of income Alan recognizes when he receives the rights?
b) What is the amount and character of gain or loss Alan recognizes when he sells the rights?
c) What is the amount and character of gain or loss Alan recognizes when he exercises the rights?
d) What is the amount and character of gain or loss Alan recognizes when he sells the new common stock?
e) What basis does Alan have in his remaining shares?

Accepted Answer

The answer of Ace Corporation has a single class of...

Question 18

Why are stock dividends generally nontaxable? Under what circumstances are stock dividends taxable?

Accepted Answer

The answer of Why are stock dividends generally nontaxable? Under...

Question 19

Identify which of the following statements is false.
A) The distribution of stock rights will be taxable if the value of the stock rights is more than 15% of the value of the underlying stock.
B) The distribution of stock rights is generally tax free under Sec. 305.
C) If the value of stock rights is less than 15% of the value of the underlying stock, the basis of the rights is zero unless the shareholder elects to allocate basis to the rights.
D) The holding period for stock rights includes the holding period for the underlying stock.

Accepted Answer

The statement that the distribution of stock rights will be taxable if the value of the stock rights is more than 15% of the value of the underlying stock is false. The threshold is actually 25%, not 15%.

Question 20

Checkers Corporation has a single class of common stock outstanding. Bert owns 100 shares, which he purchased five years ago for $200,000. In the current year, when the stock is worth $2,500 per share, Checkers Corporation declares a 10% stock dividend payable in common stock. Bert receives ten additional shares on December 10 of the current year. On January 25 of next year he sells all ten shares for $30,000.
a) How much income must Bert recognize when he receives the stock dividend?
b) How much gain or loss must Bert recognize when he sells the ten shares he received as a stock dividend?

Accepted Answer

The answer of Checkers Corporation has a single class of...

Quiz 4: Corporate Nonliquidating Distributions

Identify which of the following statements is true.

A partial liquidation of a corporation is treated as a dividend in the case of a corporate shareholder.

A stock redemption is always treated as if the shareholder sold his stock to the corporation.

Which of the following is not a condition that permits a stock redemption to be treated as a sale?

Which of the following requirements must be met for a redemption to be treated as substantially disproportionate?

Identify which of the following statements is true.

The Sec. 318 family attribution rules can be waived for purposes of the Sec. 302(b)(3) complete termination rules even though the redeeming shareholder is a creditor of the corporation.

Joshua owns 100% of Steeler Corporation's stock. Joshua's basis in the stock is $8,000. Steeler Corporation has E&P of $40,000. If Steeler Corporation redeems 60% of Joshua's stock for $50,000, Joshua must report dividend income of

Bruce receives 20 stock rights in a nontaxable distribution. The stock rights have an FMV of $5,000. The common stock with respect to which the rights are issued has a basis of $4,000 and an FMV of $120,000. Bruce allows the stock rights to lapse. He can deduct a loss of

Elijah owns 20% of Park Corporation's single class of stock. Elijah's basis in the stock is $8,000. Park's E&P is $28,000. If Park redeems all of Elijah's stock for $48,000, Elijah must report dividend income of

Identify which of the following statements is true.

Identify which of the following statements is true.

What are the consequences of a stock redemption to the distributing corporation?

Which of the following is not a reason for a stock redemption?

Family Corporation, a corporation controlled by Buddy's family, redeems all of Buddy's stock. For the redemption to be treated as a sale, which one of the following conditions must be met?

Identify which of the following statements is false.

Why are stock dividends generally nontaxable? Under what circumstances are stock dividends taxable?

Identify which of the following statements is false.