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.

Accepted Answer

The assurance of sale treatment for both shareholders in exchange for a portion of their stock for the proceeds from the sale of the tie business is not guaranteed without specific details on the structure of the transaction and tax considerations. The tax implications and treatment depend on how the transaction is structured, such as a direct sale of assets, a spin-off, or a split-off, and the specific tax laws applicable at the time of the transaction.

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.

Accepted Answer

For tax purposes, under certain conditions, a shareholder's interest in a corporation can be redeemed without the transaction being treated as a dividend, allowing for capital gains treatment instead. The attribution rules, which consider the ownership of family members as owned by the taxpayer, can be waived if certain requirements are met, such as the shareholder completely terminating their interest and not being involved in the business for a certain period after the sale.

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.

Accepted Answer

The statement is true because, for a sale treatment to be assured for shareholders in the context of a corporate asset sale, the business unit being sold (in this case, the tie business) typically needs to have been operated as a trade or business for a certain period. The requirement mentioned, that the tie business has been operated by Apparel for three years and by Silk for three years prior to that, satisfies common criteria for this kind of transaction, allowing for sale treatment under tax regulations.

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.

Accepted Answer

A redemption of the estate's stock can still qualify for tax purposes even if Baxter's interest in the corporation is less than 10%.

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.

Accepted Answer

The answer of During the year, Mr.T redeemed 20 shares...

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.

Accepted Answer

Under § 318 constructive ownership rules, T Corporation's 30 percent direct ownership in R plus the 40 percent ownership of R by Mr. S (which is attributed to T Corporation because Mr. S owns 60 percent of T Corporation) results in a total of 70 percent ownership of R by T Corporation, not 54 percent.

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.

Accepted Answer

According to the constructive ownership rules of § 318, when an individual owns more than 50% of a partnership or estate, they are considered to own their proportionate share of any entity owned by that partnership or estate. Therefore, since Y&T owns 30% of R and Mr. Y owns 20% of Y&T, he is considered to own 6% (20% of 30%) of R through the partnership. Adding that to his direct ownership of 40% of R, he is considered to own 46% (40% + 6%) of R under § 318.

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.

Accepted Answer

The answer of Hedi and her daughter own all of...

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.

Accepted Answer

According to the constructive ownership rules of § 318, M is treated as owning the percentage of shares owned by C Corporation (40% of B) in addition to their own percentage of shares (60% of B). Therefore, M is treated as owning 100% of B, which is more than 50%, and thus controls the corporation.

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.

Accepted Answer

Mr.Smooth's direct ownership in Calm Corporation was 60%, but when combined with Mellow Corporation's 30% ownership in Calm, his constructive ownership was actually 78% (60% + 70% * 30%). Since he owned more than 50% of Calm, the redemption would likely be treated as a dividend rather than a sale, and he would not be able to waive the constructive ownership rules.

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.

Accepted Answer

The answer of Under the constructive ownership rules of §...

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.

Accepted Answer

The redemption does not meet the "substantially disproportionate" test because K's ownership percentage remains above 50% after the redemption, thus it is treated as a dividend.

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.

Accepted Answer

Under § 318 constructive ownership rules, C Corporation's direct ownership in B Corporation (20%) is combined with M's indirect ownership through C Corporation (40% of C's 20% in B), which does not result in an 80% ownership but rather a 28% ownership in B Corporation by C Corporation.

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.

Accepted Answer

The answer of In determining whether a redemption distribution qualifies...

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.

Accepted Answer

According to the constructive ownership rules of § 318, an individual is treated as owning stock that is owned by their spouse, children, grandchildren, and certain other related parties. In this scenario, Mr.S owns 40 percent of R Corporation and T Corporation owns 30 percent of R Corporation. Therefore, under § 318, Mr.S is treated as owning the 30 percent of R Corporation owned by T Corporation, bringing his total ownership of R Corporation to 70 percent (40 percent + 30 percent).

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.

Accepted Answer

If the tie business was acquired in a nontaxable merger three years ago, it may qualify for sale treatment under certain conditions, such as meeting the continuity of interest and continuity of business enterprise requirements, which can provide favorable tax treatment for shareholders.

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.

Accepted Answer

The answer of Mr.Y owns 40 percent of R Corporation...

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.

Accepted Answer

The answer of Clothing Inc.and Mr.Red Button formed Apparel Corp.in...

Question 19

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

Accepted Answer

The answer of Corporate taxpayers favor sale treatment in stock...

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.

Accepted Answer

The redemption does not qualify for exchange treatment because B still owns more than 50% of the corporation's stock after the redemption, failing the "substantially disproportionate" test for exchange treatment.

Quiz 4: Corporate Distributions: Stock Redemptions and Partial Liquidations