Question 1

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.

Accepted Answer

The sale of stock by T to X Corporation does not automatically assure exchange treatment under tax laws. The treatment of the sale for tax purposes depends on various factors including the structure of the transaction and specific tax regulations, which may result in capital gains treatment rather than exchange treatment.

Question 2

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

Accepted Answer

If a redemption does not qualify for sale treatment, it is treated as a property distribution. Therefore, the full amount received is considered a dividend to the extent it is paid out of the corporation's earnings and profits (E&P).

Question 3

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.

Accepted Answer

If B received the preferred stock as a nontaxable stock dividend when the corporation had a deficit in E&P, the basis of the stock would be zero. When B sells the stock, any amount received in excess of zero would be treated as a capital gain. Since B is selling the stock to an unrelated third party, the sale would qualify for sale treatment.

Question 4

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.

Accepted Answer

The answer of T redeems her § 306 stock.The amount...

Question 5

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.

Accepted Answer

When T receives preferred stock in V as part of a merger, it is treated as a nontaxable stock dividend. This is because T is exchanging her stock in W for stock in V, and the preferred stock is considered a dividend on the common stock she already owned in W. Therefore, there is no taxable event for T when she receives the preferred stock in V.

Question 6

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.

Accepted Answer

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

Question 7

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.

Accepted Answer

Apparel would recognize a gain of $158,000 ($200,000 + $45,000 - $60,000 - $20,000 for the plant and equipment, since gains are recognized on distributions of property in redemption of stock, but it would not recognize the $7,000 loss on the truck because losses are generally not recognized on distributions of property to shareholders.

Question 8

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?

Accepted Answer

Stein Corporation directly owns 30 shares. Indirectly, through George's 70% ownership, it has an interest in 7 shares (70% of George's 10 shares) and 28 shares (70% of G&D's 40 shares). Total interest = 30 + 7 + 28 = 65 shares, which is 65% of Yankee Corporation.

Question 9

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

Accepted Answer

The answer of C, an individual, owns 80 of the...

Question 10

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?

Accepted Answer

Under § 318, Brian is considered to own his shares plus those owned by his parents. Therefore, he owns 10 (his own) + 50 (Mr. Nickel) + 10 (Mrs. Nickel) = 70 shares. Additionally, he is attributed 20% of the shares owned by N&N Partnership (10 shares), which is 2 shares, and 60% of the shares owned by NNN Corporation (10 shares), which is 6 shares. Thus, Brian constructively owns 70 + 2 + 6 = 78 shares, or 78%.

Question 11

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.

Accepted Answer

Given the scenario, the most logical form for this transaction would be a spin-off or a division, where the tie business is separated from Apparel Corp. and transferred to Mr. Red Button, allowing both entities to operate independently. A partial liquidation typically involves the distribution of assets to shareholders and does not align with the intention of continuing the tie business separately.

Question 12

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

Accepted Answer

Since Barbara sold back her shares to the corporation, she received a payment from the corporation that is treated as a distribution to a shareholder, which is a dividend because the amount exceeds the shareholder's basis in the stock. The dividend amount is equal to the amount of cash received, which is $20,000 in this case. Therefore, Barbara's A.G.I. will increase by a dividend of $20,000.

Question 13

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.

Accepted Answer

The distribution does not qualify for partial liquidation treatment because the belt business has not been operated by T as a separate and distinct division for at least 5 years prior to the distribution, as required by the IRS for such treatment.

Question 14

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

Accepted Answer

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

Question 15

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.

Accepted Answer

The answer of In order for a redemption or partial...

Question 16

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.

Accepted Answer

A distribution in partial liquidation is considered a return of capital and not a dividend, and is not subject to the same taxation rules. However, if the distribution is due to a genuine contraction of the corporation's business, it is still considered a return of capital and not a dividend.

Question 17

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?

Accepted Answer

The answer of F Corporation has 100 shares of outstanding...

Question 18

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.

Accepted Answer

Since F is redeeming all of his shares, it can be treated as a sale and qualify for capital gain or loss treatment.

Question 19

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

Accepted Answer

When a shareholder sells shares back to the corporation and the corporation has substantial earnings and profits, the transaction is treated as a dividend to the extent of the corporation's earnings and profits. Therefore, Jim's AGI will increase by a dividend of $10,000.

Question 20

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.

Accepted Answer

The sale of shares by an individual to a corporation does not automatically guarantee exchange treatment under tax laws. Exchange treatment typically applies to like-kind exchanges or specific corporate reorganizations, not to straightforward sales of stock for cash or other consideration.

Quiz 4: Corporate Distributions: Stock Redemptions and Partial Liquidations