Question 1

For purposes of a partial liquidation,the "not essentially equivalent to a dividend" test is applied at the shareholder level.

Accepted Answer

The distribution must result in a genuine contraction of the corporation's business.

Question 2

James and his son are the sole shareholders of Wren Corporation.During the current year,Wren distributes cash in redemption of all of James's stock.James continues to serve on the board of directors of Wren Corporation.The distribution is a complete termination redemption resulting in sale or exchange treatment for James.

Accepted Answer

The family attribution waiver cannot apply because serving on the board of directors is a prohibited interest.James is deemed to own the stock of his son,or 100% of the stock,after the redemption; thus,the distribution is a nonqualified redemption.

Question 3

For a stock redemption to qualify for sale or exchange treatment under § 303,it must satisfy the § 302 redemption provisions.

Accepted Answer

One of the principal advantages of a redemption to pay death taxes is that the § 302 provisions do not apply.

Question 4

In a redemption to pay death taxes,stock in corporations in which the decedent held a 20% or more interest is treated as stock in a single corporation for purposes of determining whether the value of stock owned by the decedent exceeds 35% of the value of the decedent's adjusted gross estate.

Accepted Answer

This statement is true according to IRC Section 6166(g)(2)(A). The value of stock in corporations in which the decedent held a 20% or more interest is aggregated and treated as stock in a single corporation for purposes of determining whether the value of stock owned by the decedent exceeds 35% of the value of the decedent's adjusted gross estate. This aggregation rule applies only for purposes of the estate tax and does not affect the treatment of the stock for any other tax purposes.

Question 5

In applying the stock attribution rules to a stock redemption,a shareholder is treated as owning the stock of her grandchildren.

Accepted Answer

Grandchildren are included as family members for purposes of the § 318 attribution rules.

Question 6

At a time when Blackbird Corporation had E & P of $600,000 and 1,000 shares of stock outstanding,the corporation distributed $200,000 to redeem 200 shares of its stock.The transaction qualified as a disproportionate redemption for the shareholder.Blackbird's E & P is reduced by $120,000 as a result of the distribution.

Accepted Answer

The reduction in Blackbird's E & P is the lesser of (1)the amount of the distribution ($200,000),or (2)the same percentage of E & P as the percentage of stock redeemed (20% F1F1F1S1F1F1F10 $600,000 = $120,000).

Question 7

All of the stock in Robin Corporation (E & P of $600,000)is held by three unrelated individuals as follows: Shontelle has 150 shares,Marta has 150 shares,and Diego owns 200 shares.Robin Corporation redeems 100 of Diego's shares (basis of $9,000)for $50,000.If Diego's stock is a capital asset that has been held for the requisite holding period,he has a long-term capital gain of $41,000.

Accepted Answer

The transaction qualifies under § 302(b)(2)as a disproportionate redemption.Diego had a 40% ownership in Robin Corporation before the redemption and a 25% ownership after the redemption (100 shares owned by Diego after redemption ÷ 400 shares outstanding after redemption = 25%).This represents less than 80% of his original ownership [25% < 32% (80% F1F1F1S1F1F1F10 40%)] and less than 50% of the total voting power of the corporation.

Question 8

Betty's adjusted gross estate is $3 million.The death taxes and funeral and administration expenses of her estate total $500,000.Included in Betty's estate is stock in Heron Corporation,valued at $900,000 as of the date of death.Betty had acquired the stock six years ago at a cost of $175,000.If Heron Corporation redeems $500,000 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 value of the Heron Corporation stock in Betty's estate does not exceed 35% of the value of the adjusted gross estate ($900,000 F1F1F1S1F1F1F10 $3,000,000 = 30%); thus,the transaction does not qualify under § 303 for sale or exchange treatment.

Question 9

Hummingbird Corporation (E & P of $800,000)distributes land (fair market value of $250,000; basis of $300,000)to an estate in a redemption to pay death taxes under § 303.Hummingbird Corporation will recognize a loss of $50,000 as a result of the distribution.

Accepted Answer

Section 311 requires recognition of gains but not losses in nonliquidating distributions of property,including distributions in qualifying stock redemptions.

Question 10

Bluebird Corporation's 500 shares outstanding are owned as follows: Lucinda,200 shares; Carl (Lucinda's father),100 shares; and Nancy (Lucinda's sister),200 shares.During the current year,Bluebird (E & P of $800,000)redeemed 80 shares of Lucinda's stock for $60,000.If Lucinda had acquired the 80 shares five years ago for $10,000,she will have a long-term capital gain of $50,000 from the redemption.

Accepted Answer

Under the family attribution rules,Lucinda is deemed to own the shares owned by her father,Carl,but not her sister,Nancy.After the redemption,Lucinda therefore owns 220 shares of Bluebird Corporation (120 shares directly plus Carl's 100 shares indirectly).Lucinda's post-redemption ownership percentage is 52.4% (220 shares F1F1F1S1F1F1F10 420 shares).This ownership interest fails the disproportionate redemption test that requires the taxpayer to own less than 50% of total voting power after the redemption.Further,Lucinda's majority shareholder interest after the redemption fails the meaningful reduction test for a not essentially equivalent redemption.Thus,Lucinda has $60,000 of dividend income from the redemption.(Her $10,000 basis in the shares redeemed attaches to the basis of her remaining 120 shares.)

Question 11

A partial liquidation can result in sale or exchange treatment to a shareholder even if it results in a pro rata stock redemption.

Accepted Answer

A stock redemption pursuant to a partial liquidation can be pro rata with respect to the shareholders.

Question 12

In determining whether the meaningful reduction test has been met (for purposes of a not essentially equivalent redemption),the most significant factor considered is a reduction in the shareholder's voting control.

Accepted Answer

The reduction in the shareholder's voting control is the most significant factor considered in determining whether the meaningful reduction test has been met. Other factors, such as a reduction in the shareholder's equity interest or economic interest, may also be considered, but the voting control is the primary factor.

Question 13

An advantage of using a stock redemption to acquire shares from the estate of a deceased shareholder is that the other shareholders would not be required to use their own funds for the acquisition.

Accepted Answer

When a stock redemption is used to acquire shares from the estate of a deceased shareholder, the corporation buys back the shares using its own funds. This means that the other shareholders are not required to contribute their own money for the acquisition.

Question 14

A corporate distribution treated as a stock redemption under state law will always result in sale or exchange treatment for the shareholder.

Accepted Answer

The tax treatment accorded a stock redemption is determined by the Code,not by state law.A corporate distribution treated as a stock redemption under state law may not satisfy any of the qualifying stock redemption provisions of the Code.

Question 15

In 2003,Floyd carried out a successful complete termination redemption of his stock in Gray Corporation.Floyd was able to qualify the transaction as a complete termination redemption only by use of the family attribution waiver.In 2008,Floyd inherits stock in Gray Corporation from his father.Floyd has acquired a prohibited interest within the 10-year postredemption period and,as a result,the 2003 redemption no longer qualifies as a complete termination redemption.

Accepted Answer

It is permissible to reacquire an interest by inheritance.

Question 16

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

Accepted Answer

Because of the dividends received deduction available to corporate shareholders,a corporate shareholder would report only a small portion of a dividend distribution received as taxable income.

Question 17

A shareholder's basis in property received in a qualifying stock redemption is the property's fair market value but the basis of property received in a nonqualified stock redemption is same as the corporation's basis in the property.

Accepted Answer

The basis of property received in any stock redemption,qualifying or not,is the property's fair market value on the date of the distribution.

Question 18

A corporate distribution to a noncorporate shareholder that is a return from the shareholder's investment receives more favorable tax treatment than a distribution that is a return of the shareholder's investment.

Accepted Answer

Distributions that are returns of the shareholder's investment are treated as a sale or exchange of the investment.Distributions that are returns from the shareholder's investment are dividend distributions.

Question 19

In applying the stock attribution rules to a stock redemption,stock owned by a partner is deemed to be owned in full by the partnership.

Accepted Answer

According to the stock attribution rules, stock owned by a partner is deemed to be owned in full by the partnership in the case of a stock redemption. This is because the partnership is treated as a separate entity for tax purposes and the redeemed stock is considered to be owned by the partnership, rather than the individual partner. Therefore, option A is correct.

Question 20

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.As a result of the loan,the redemption of Reginald's stock cannot qualify for sale or exchange treatment.

Accepted Answer

Creditor interests,such as Reginald's loan to Robin,are not prohibited interests for purposes of the family attribution waiver.Assuming that Reginald satisfies the other requirements of the family attribution waiver (e.g.,required agreement filed),the redemption can qualify for sale or exchange treatment under the complete termination redemption provision.

Quiz 6: Corporations: Redemptions and Liquidations