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Exam 19: Corporations: Distributions Not in Complete Liquidation

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Question 61

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Which of the following is a correct statement regarding a redemption to pay death taxes under § 303?

A) An estate recognizes gain on the redemption equal to the excess of the distribution proceeds over the decedent's basis in the stock.
B) The value of the stock in the decedent's gross estate must exceed 40% of the value of the adjusted gross estate.
C) A corporation recognizes gains and losses on the distribution of property in the redemption.
D) The redemption need not satisfy any of the § 302 qualifying stock redemption provisions.
E) None of the above.

F) C) and D)
G) A) and D)

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Question 62

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Which of the following is not an economic distortion created by the double tax on dividends?

A) An incentive to invest in noncorporate rather than corporate businesses.
B) An incentive for corporations to finance operations with debt rather than equity.
C) An incentive to invest domestically rather than internationally.
D) An incentive for corporations to retain earnings and structure distributions to avoid dividend treatment.
E) All of the above represent economic distortions created by the double tax on dividends.

F) A) and B)
G) None of the above

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Question 63

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Five years ago,Eleanor transferred property she had used in her sole proprietorship to Blue Corporation for 1,000 shares of Blue Corporation in a transaction that qualified under § 351.The assets had a tax basis to her of $100,000 and a fair market value of $270,000 on the date of the transfer.In the current year,Blue Corporation ( E & P $800,000) redeems 250 shares from Eleanor for $220,000 in a transaction that qualifies for sale or exchange treatment.With respect to the redemption,Eleanor will have a:

Which of the following statements is incorrect with respect to determining current E & P?

The adjusted gross estate of Keith,decedent,is $6 million.Included in the gross estate is stock in Gold Corporation (E & P of $750,000) ,a closely held corporation,valued at $2.4 million as of the date of Keith's death in 2011.Keith had acquired the stock twelve years ago at a cost of $420,000.Death taxes and funeral and administration expenses for Keith's estate are $1.2 million.Gold Corporation redeems one-half of the stock from Keith's estate in a § 303 redemption to pay death taxes using property with a fair market value of $1.2 million (adjusted basis of $950,000) .Which of the following is a correct statement regarding the tax consequences of this redemption?

Kite Corporation has 1,000 shares of stock outstanding.Kent owns 250 shares,Kent's father owns 150 shares,Kent's brother owns 250 shares,and Kent's son owns 50 shares.Plover Corporation owns the other 300 shares in Kite Corporation.Kent owns 60% of the stock in Plover Corporation.Applying the § 318 stock attribution rules,how many shares does Kent own in Kite Corporation?

Which one of the following statements about property distributions is false?

Tungsten Corporation,a calendar year cash basis taxpayer,made estimated tax payments of $800 each quarter in 2011,for a total of $3,200.Tungsten filed its 2011 tax return in 2012 and the return showed a tax liability $4,200.At the time of filing,March 15,2012,Tungsten paid an additional $1,000 in Federal income taxes.How does the additional payment of $1,000 impact Tungsten's E & P?

Ivory Corporation (E & P of $650,000)has 1,000 shares of common stock outstanding owned by unrelated parties as follows: Veronica,500 shares,and Tommie,500 shares.Veronica and Tommie each paid $125 per share for the Ivory stock 12 years ago.In May of the current year,Ivory distributes securities held as an investment (basis of $140,000,fair market value of $250,000)to Veronica in redemption of 200 of her shares.

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.

Currently,Brown Corporation (E & P of $800,000) has 1,000 shares of common stock outstanding.Pat owns 200 shares.His wife owns 400 shares,his daughter owns 100 shares,and his father owns 300 shares.Two years ago,Pat transferred $30,000 to Brown Corporation in exchange for 100 newly issued shares of nonvoting preferred stock.In the current year,Brown Corporation redeems Pat's preferred stock for $50,000,its fair market value.With respect to the distribution in redemption of the preferred stock:

Betty's adjusted gross estate is $7 million.The death taxes and funeral and administration expenses of her estate total $800,000.Included in Betty's gross estate is stock in Heron Corporation,valued at $2.1 million as of the date of her death in 2011.Betty had acquired the stock six years ago at a cost of $410,000.If Heron Corporation redeems $800,000 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.

The tax treatment of corporate distributions at the shareholder level does not depend on:

Renee,the sole shareholder of Indigo Corporation,sold her stock to Chad on July 1 for $180,000.Renee's stock basis at the beginning of the year was $120,000.Indigo made a $60,000 cash distribution to Renee immediately before the sale,while Chad received a $120,000 cash distribution from Indigo on November 1.As of the beginning of the current year,Indigo had $26,000 in accumulated E & P,while current E & P (before distributions) was $90,000.Which of the following statements is correct?

Thistle Corporation declares a nontaxable dividend payable in rights to subscribe to common stock.One right and $25 entitle the holder to subscribe to one share of stock.One right is issued for each share of stock held.Annette,a shareholder,owns 200 shares of stock that she purchased five years ago for $3,000.At the date of distribution of the rights,the market values were $50 per share for the stock and $25 for a right.Annette received 200 rights.She exercises 160 rights and purchases 160 additional shares of stock.She sells the remaining 40 rights for $1,080.What are the tax consequences to Annette?

On January 1,Tulip Corporation (a calendar year taxpayer)has accumulated E & P of $300,000.Its current E & P for the year is $90,000 (before considering dividend distributions).During the year,Tulip distributes $600,000 ($300,000 each)to its equal shareholders,Anne and Tom.Anne has a basis in her stock of $65,000,while Tom's basis is $120,000.What is the effect of the distribution by Tulip Corporation on Anne and Tom?

A corporation that distributes a property dividend must reduce its E & P by the adjusted basis of the property less any liability on the property.

Hazel,Emily,and Frank,unrelated individuals,own all of the stock in Wren Corporation (E & P of $1.2 million) as follows: Hazel,1,300 shares; Emily,400 shares; and Frank,300 shares.Wren redeems 300 of Hazel's shares (basis of $60,000) for $450,000.With respect to the distribution in redemption of the stock:

A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.

Blue Corporation,a cash basis taxpayer,has taxable income of $700,000 for the current year.Blue elected $80,000 of § 179 expense.It also had a related party loss of $30,000 and a realized (not recognized) gain from an involuntary conversion of $85,000.It paid Federal income tax of $185,000 and a nondeductible fine of $20,000.Blue's current E & P is: