Question 1

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 2

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 3

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

The answer of In general, if a shareholder's ownership interest...

Question 4

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 (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...

Question 5

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 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

Paul's basis in the shares is $30,000, and he sold them for $100,000. The difference of $70,000 is a long-term capital gain because he held the shares for more than one year (specifically, five years).

Question 6

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

The IRS requires notification within 30 days if a former shareholder acquires a prohibited interest to ensure compliance with the waiver of family attribution rules.

Question 7

For purposes of a partial liquidation, the termination of a business test is a subjective test that should be relied upon only after obtaining a favorable ruling from the IRS.

Accepted Answer

The termination of a business test for a partial liquidation is an objective test based on the facts and circumstances of the case, not a subjective test requiring a favorable IRS ruling.

Question 8

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

Grackle Corporation will recognize a gain on the distribution of the land, calculated as the fair market value of the land ($400,000) minus its basis ($250,000), resulting in a gain of $150,000. Additionally, since the land is subject to a mortgage of $460,000, which exceeds the fair market value, Grackle will recognize an additional gain of $60,000 (the excess of the mortgage over the fair market value). Thus, the total gain recognized is $150,000 + $60,000 = $210,000.

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

Betty's adjusted gross estate is $18 million. The death taxes and funeral and administration expenses of her estate total $2.4 million. Included in Betty's gross estate is stock in Heron Corporation valued at $6.6 million as of the date of her death. Betty had acquired the stock six years ago at a cost of $1,620,000. If Heron Corporation redeems $2.4 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

Under IRC § 303, a redemption of stock to pay death taxes can qualify for sale or exchange treatment if the value of the stock redeemed does not exceed the sum of the estate, inheritance, legacy, and succession taxes, plus the funeral and administration expenses. Since the redemption amount ($2.4 million) is being used to cover such expenses, it meets the criteria for § 303, assuming other conditions of § 303 are also met.

Question 11

Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year. $\begin{array}{lr}
\text { Federal income taxes paid } & \$ 110,000 \
\text { Net operating loss carry forward deducted currently } & 70,000 \
\text { Gain recognized this year on an installment sale from a prior year } & 44,000 \
\text { Depreciation deducted on tax return (ADS depreciation would have been } \$ 10,000) & 40,000 \
\text { Interest income on Iowa state bonds } & 8,000
\end{array}$ Rose Corporation's current E & P is:

Accepted Answer

The answer of Rose Corporation (a calendar year taxpayer) has...

Question 12

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 13

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

Accepted Answer

Corporate shareholders typically receive more favorable tax treatment from a qualifying stock redemption, as it may be treated as a capital gain, which is often taxed at a lower rate than dividends.

Question 14

Six years ago, both Ronald and his mom 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 inheritance of stock by Ronald does not constitute a prohibited interest in the context of the family attribution waiver rules, as the waiver was already effectively utilized for the prior transaction, and the inheritance itself does not violate the terms of the complete termination redemption previously reported.

Question 15

Reginald and Roland (Reginald's son) each own 50% of the stock of Robin Corporation. Reginald's stock interest is entirely redeemed by Robin. Two years later, Reginald loans Robin $250,000. The loan to Robin Corporation does not constitute a prohibited interest for purposes of the family attribution waiver.

Accepted Answer

The loan from Reginald to Robin Corporation does not constitute a prohibited interest because the family attribution rules, which might otherwise attribute Roland's stock ownership to Reginald, do not apply to a bona fide debt arrangement. The waiver for family attribution applies to genuine creditor-debtor relationships, allowing Reginald to lend money to the corporation without his interest being considered prohibited due to family attribution rules.

Question 16

The Code treats corporate distributions that are a return of a shareholder's investment as sales or exchanges and corporate distributions that are a return from a shareholder's investment as dividends.

Accepted Answer

The Code distinguishes between distributions that return a shareholder's investment (treated as sales or exchanges) and distributions that are returns on investment (treated as dividends).

Question 17

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 redemption is considered not essentially equivalent to a dividend (and thus can qualify for sale or exchange treatment) only if it results in a meaningful reduction of the shareholder's interest in the corporation, indicating a genuine change in the shareholder's relationship with the corporation.

Question 18

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 19

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

In a stock redemption, when a shareholder receives property, the basis of that property for the shareholder is its fair market value on the date of the redemption. This basis is used for calculating gain or loss if the property is later disposed of.

Question 20

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 § 318 stock attribution rules include attribution from a spouse, children, grandchildren, and parents, but not siblings.

Quiz 19: Corporations: Distributions Not in Complete Liquidation

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.