Question 1

Goldfinch Corporation distributes stock rights to its shareholders.How is the basis of the stock rights received by Goldfinch's shareholders determined?

Accepted Answer

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Question 2

Christian,the president and sole shareholder of Venture Corporation,is paid an annual salary of $150,000.Christian would like to draw additional funds from the corporation but is concerned that increased salary might cause the IRS to contend his salary is unreasonable.Further,Christian does not want the corporation to pay any dividends.He would like to contribute $40,000 to his alma mater to establish scholarships for needy students.If Christian makes a pledge to the university to provide $40,000 for scholarships,would there be a problem if Venture Corporation paid the pledge on his behalf? Explain.

Accepted Answer

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Question 3

Finch Corporation distributes property (basis of $225,000,fair market value of $300,000)to a shareholder in a distribution that is a qualifying stock redemption.The property is subject to a liability of $160,000,which the shareholder assumes.The basis of the property to the shareholder is:

Accepted Answer

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Question 4

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

According to the IRS, the shareholder's basis in property acquired in a stock redemption is the property's fair market value as of the date of redemption. This is generally known as a deemed sale of the property to the corporation.

Question 5

The built-in loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property's fair market value after its transfer to the corporation.

Accepted Answer

The built-in loss limitation only applies to losses that existed at the time of the property's transfer to the corporation, not those that occur after the transfer due to declining fair market value.

Question 6

Seven years ago,Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351.The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer.In the current year,Blue Corporation (E & P of $1 million)redeems 600 shares from Eleanor for $260,000 in a transaction that does not qualify for sale or exchange treatment.With respect to the redemption,Eleanor will have a:

Accepted Answer

Since the redemption does not qualify for sale or exchange treatment, it will be treated as a dividend to the extent of Blue Corporation's current E & P ($260,000). Therefore, Eleanor will have a $260,000 dividend.

Question 7

In general,how are current and accumulated earnings and profits allocated to corporate distributions?

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Question 8

Briefly discuss the rules related to distributions of non-cash property.

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Question 9

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

Accepted Answer

When a shareholder participates in a qualifying stock redemption, it may be treated as a sale of their shares and they may have to pay capital gains tax on any gain from the sale. In contrast, dividend distributions may be taxed at a lower rate for corporate shareholders.

Question 10

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 11

Briefly describe the rationale for the reduced tax rate on dividends for individual taxpayers.

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Question 12

Ethel,Hannah,and Samuel,unrelated individuals,own the stock in Broadbill Corporation (E & P of $700,000)as follows: Ethel,300 shares;Hannah,300 shares;and Samuel,400 shares.Broadbill redeems 200 of Samuel's shares (basis of $175,000)for $250,000.If Samuel's stock is a capital asset and has been held for over three years,Samuel has:

Accepted Answer

Since Samuel's stock is a capital asset and has been held for over three years, the redemption qualifies for long-term capital gain treatment. The amount of gain is calculated as the redemption price ($250,000) minus the basis ($175,000), resulting in a long-term capital gain of $75,000.

Question 13

What is a constructive dividend? Provide several examples of the term.

Accepted Answer

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Question 14

Pursuant to a complete liquidation,Lilac Corporation distributes the following assets to its unrelated shareholders: land held for three years as an investment (basis of $300,000,fair market value of $600,000),inventory (basis of $100,000,fair market value of $80,000),and marketable securities held for four years as an investment (basis of $200,000,fair market value of $240,000).What are the tax consequences to Lilac Corporation as a result of the liquidation?

Accepted Answer

When a corporation completely liquidates, it must recognize gain or loss on the distribution of its assets to the shareholders. In this case, Lilac Corporation will recognize a capital gain of $300,000 ($600,000 fair market value of land - $300,000 basis) and a capital gain of $40,000 ($240,000 fair market value of securities - $200,000 basis). However, it will also recognize an ordinary loss of $20,000 because the inventory's fair market value is less than its basis. Therefore, the net capital gain will be $340,000 and the ordinary loss will be $20,000, making choice C the correct answer.

Question 15

Seven years ago,Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 2,000 shares of Blue Corporation in a transaction that qualified under § 351.The assets had a tax basis to her of $400,000 and a fair market value of $700,000 on the date of the transfer.In the current year,Blue Corporation (E & P of $1 million)redeems 600 shares from Eleanor for $260,000 in a transaction that qualifies for sale or exchange treatment.With respect to the redemption,Eleanor will have a:

Accepted Answer

Since the transfer of property to Blue Corporation qualified under § 351, Eleanor did not recognize any gain or loss on the transfer to Blue Corporation. Her basis in the 2,000 shares of Blue Corporation received in exchange for the property would be the same as her basis in the transferred property ($400,000).

When Blue Corporation redeems 600 of Eleanor's shares for $260,000, this is treated as a partial liquidation of her investment in Blue Corporation. The redemption qualifies for sale or exchange treatment, which means that it is treated as a capital transaction.

Eleanor's recognized gain is calculated by comparing the amount realized from the redemption ($260,000) to her adjusted basis in the redeemed shares ($120,000, which is 600/2,000 of her original basis of $400,000). Therefore, her recognized gain is $140,000 ($260,000 - $120,000) and it is treated as a capital gain.

Question 16

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

If the shareholder's ownership interest is not diminished as a result of a stock redemption, the transaction is generally treated as a distribution and not as a sale or exchange. However, there are exceptions to this rule, such as when the redemption is essentially equivalent to a dividend under the tax law.

Question 17

Briefly define the term "earnings and profits."

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Quiz 13: Corporations: Earnings Profits and Distributions