Mr. and Mrs. Yamashita Tomohisa reported an adjusted gross income of $70,000
for the current tax year (Year One). During the year, they incurred two casualty
losses, both federally declared disasters. For each, indicate the amount that can be
included in determining casualty losses when calculating their itemized deduction
amount. If no deduction indicate 0. Then, compute the total amount of the
casualty loss to be included within itemized deductions.
The personal residence owned by the taxpayers was lost in a fire that destroyed much of the state. The tax basis was $350,000. The house was worth $380,000 before the fire and $290,000 after. The insurance company paid $30,000.
Correct (59900)
Total amount of casualty loss that can be included with the taxpayers’ itemized deductions
Correct (70800)
2. An antique automobile owned by the taxpayers was damaged by a severe hurricane. The tax basis was $30,000. The car was worth $92,000 before the storm but only $45,000 after. The insurance company paid $12,000. | (17900) |
The personal residence owned by the taxpayers was lost in a fire that destroyed much of the state. The tax basis was $350,000. The house was worth $380,000 before the fire and $290,000 after. The insurance company paid $30,000. | (17900) |
3. Total amount of casualty loss that can be included with the taxpayers’ itemized deductions | (17900) |
| Bob owns 250 shares of Rice Corporation. Rice Corporation plans on redeeming 100 shares of its 500 shares of common stock outstanding. Below what percentage must Bob’s interest be reduced if the redemption is to be substantially disproportionate? |
Substantially disproportionate means that the amount received by shareholders is not in the same proportion as their stock holdings. To qualify, immediately after redemption, the shareholder must own (1) less than 50% of the voting power of outstanding voting stock and (2) less than 80% of interest in both the common stock and voting stock owned before the redemption by the shareholder. Bob owns 50% of Rice Corporation before the redemption (250 ÷ 500). Thus, Bob must reduce his interest below 40% (50% × 80%).
| Rachel purchased 100 shares of Comet Corporation stock for $500 in Year 1. In Year 4, Rachel received $5,000 in a distribution from the partial liquidation of Comet Corporation. On her personal Year 4 income tax return, Rachel must report income from this transaction as |
Section 302(b)(4) allows noncorporate shareholders who receive redemptions in partial liquidation to treat the distribution as payment for their stock. Any gain on the redemption is eligible for capital gain treatment.
In Year 1, pursuant to a complete liquidation, Richards Corporation distributes the following to a shareholder: inventory, basis $10,000, FMV $20,000; and land held as an investment, basis $5,000, FMV $40,000. The land is subject to a $30,000 liability. What are the amounts and character of income to be recognized by Richards Corporation?
| Annual statement Form 1099-DIV must be furnished to recipients of which of the following? |
| Shares owned by which of the following are NOT considered to be constructively owned by the shareholder? |
Shares owned directly or indirectly by or for the shareholder’s spouse, children, grandchildren, or parents are considered constructively owned by the shareholder (excludes siblings and grandparents). The shareholder’s cousin is not considered a related party for this purpose.
Mike owned two blocks of Biddle Corporation stock, which had the following characteristics:
Mike’s two blocks of stock combined represented 10% of Biddle Corporation’s only class of stock outstanding. Pursuant to Biddle’s complete liquidation, Mike received a $100,000 cash distribution on December 1, Year 2, in exchange for his 250 shares. Biddle’s earnings and profits balance immediately before any liquidating distributions was $100,000. What are the amount and the character of Mike’s gain or loss? |
Section 331 provides capital gain or loss treatment for distributions received by a shareholder in complete liquidation of a corporation. The gain or loss will be long-term or short-term depending on the length of time the stock has been held (Sec. 1222). The shareholder’s gain or loss is the difference between the amount realized and the basis in the stock. The amount realized by Mike is $400 per share ($100,000 distribution ÷ 250 shares owned). The sale of Block 1 produces a gain of $40,000 [200 shares × ($400 selling price – $200 per share basis)]. The gain is long-term because the stock was held for more than 1 year. The sale of Block 2 produces a loss of $5,000 [50 shares × ($500 per share basis – $400 per share selling price)]. The loss is short-term because the stock was held less than 1 year.
Turbo Corporation distributed land to shareholder Lea in partial liquidation of her interest. At the time of the distribution, the land had an adjusted basis of $80,000 and a fair market value of $125,000. Lea exchanged 90 of 100 shares of Turbo stock for the land. At the time of the partial liquidation, Lea’s adjusted basis in the 90 shares was $60,000. Other unrelated shareholders of Turbo own a combined 150 shares outstanding. Just prior to the distribution, Turbo had earnings and profits of $150,000. What are the amounts and the character of income that Turbo Corporation and Lea must recognize on the partial liquidation?
Turbo Lea
A. $0 $65,000 dividend
B. $0 $65,000 Capital gain
C. $45,000 Capital gain $65,000 Capital gain
D. $45,000 Capital gain $125,000 dividend
A redemption distribution is substantially disproportionate with respect to a shareholder (and qualifies for capital gains treatment) if, after the redemption, (s)he owns less than 50% of the total combined voting power of all classes of voting stock and his or her percentage of voting stock and ownership percentage of common stock after the redemption are less than 80% of each such stock owned immediately before the redemption. Lea meets these criteria and has $65,000 of capital gain ($125,000 land value – $60,000 stock basis). Turbo has a capital gain of $45,000 because a corporation that makes an in-kind distribution of property that has a fair market value ($125,000) that exceeds its basis ($80,000) recognizes gain as if it had sold the property to the shareholder at its fair market value.
| Which of the following will NOT shorten the period for assessing the tax when a fiduciary representing a dissolving corporation requests a prompt assessment of tax under Internal Revenue Code Section 6501(d) by filing a Form 4810? |
Under Sec. 6501, the period for assessing the tax will not be shortened if the taxpayer filed a false return, willfully attempted to evade tax, did not file a return, or omitted from gross income greater than 25% of the amount of gross income stated in the return.
| Edward owns 5 of the 1,000 outstanding shares of Wasco, Inc., stock. Edward purchased his 5 shares in Year 1 for $500 per share. During Year 6, Wasco stock traded at a high of $2,000 per share. At the end of Year 6, Wasco has earnings and profits of $1,000,000. Wasco redeems all of Edward’s 5 shares at the end of Year 6 for $1,500 per share. What amount of capital gain in Year 6 must Edward report from the redemption of his Wasco stock? |
| Danny owns 35% of Batch Corporation’s only class of stock outstanding. His daughter Ann and son-in-law Tony each own 20%. Ann is legally separated from Tony. Danny’s father owns 25% of Batch’s outstanding stock. What is Ann’s percentage of stock ownership under the attribution rules for stock redemption? |
A shareholder is treated as owning shares owned by certain related parties. Stock owned directly or indirectly by or for a spouse, child, grandchild, or parent is considered to be constructively owned. However, a spouse who is legally separated is not considered a related party. Danny’s father constructively owns Ann’s shares, but Ann does not constructively own Danny’s father’s shares. Therefore, Ann is considered to own 55% of Batch’s stock (20% personally owned + 35% of father’s stock).
In Year 1, Daniel inherited 100% of Candy Corporation’s outstanding stock from his mother. The stock had a fair market value of $250,000 at the date of death and was reflected on Candy’s balance sheet as follows:
Daniel immediately withdrew $50,000 out of Candy Corporation as a dividend distribution. Later in Year 1, pursuant to a plan of liquidation, Daniel withdrew the remaining $200,000 out of Candy. For Year 1, how much will Daniel be required to report as ordinary dividend income and capital gain or loss? | |||||||||||||||||||||||||
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Because Daniel received the stock through inheritance, he takes a stepped-up basis of $250,000 (FMV at the date of the transferor’s death). The $50,000 dividend is ordinary dividend income and does not affect Daniel’s basis. Thus, when he liquidated the corporation and received the remaining $200,000, he had a capital loss of $50,000 ($200,000 distribution – $250,000 basis).Because Daniel received the stock through inheritance, he takes a stepped-up basis of $250,000 (FMV at the date of the transferor’s death). The $50,000 dividend is ordinary dividend income and does not affect Daniel’s basis. Thus, when he liquidated the corporation and received the remaining $200,000, he had a capital loss of $50,000 ($200,000 distribution – $250,000 basis).
Gus Corporation, a C corporation, is owned equally by Al, Bill, and Charlie. Their stock basis on December 31 is as follows: Al $20,000, Bill $40,000, and Charlie $40,000. Gus Corporation has earnings and profits of $90,000 at the end of the calendar year and will continue as a viable entity. Al wants to exit the corporation and pursue other interests. He surrenders all his shares and receives $15,000. What are the tax consequences to Al of this complete redemption?
Under Sec. 302(b)(3), if a corporation redeems all of its stock owned by a shareholder, the redemption is treated as a distribution in part or full payment in exchange for the stock. Since Gus Corporation redeemed all of Al’s stock, the $15,000 distribution is treated as payment for the stock, and any loss is treated as capital loss. The amount of the loss is computed under Sec. 1001 and is the amount by which the distribution is less than the shareholder’s basis in the stock. Because the distribution is treated as an exchange for the stock and not as a dividend, the amount of the corporation’s earnings and profits is irrelevant. Earnings and profits affect distributions only when those distributions have the character of dividends. In this case, the loss is $5,000 ($15,000 distribution – $20,000 basis). Additionally, since the stock is a capital asset, the recognized loss is a capital loss.
| Oak Corporation had earnings and profits of $500,000 before distributions. Due to economic conditions, Oak, in partial liquidation, distributed land having an adjusted basis to Oak of $135,000 and a fair market value of $150,000 to Mr. Brown for 95% of his interest in Oak Corporation. Mr. Brown’s adjusted basis in the stock at the time of the distribution was $180,000. What is the amount of Oak Corporation’s recognized gain or loss? |
If a corporation makes a distribution of property to a noncorporate shareholder in partial liquidation, the distribution is treated as being in exchange for stock. Since the corporation makes a distribution of property whose fair market value ($150,000) exceeds its basis ($135,000), the corporation will recognize a gain of $15,000 as if it had sold the property to the shareholder at its fair market value.
A fiduciary representing a dissolving corporation may request a prompt assessment of tax under Internal Revenue Code Section 6501(d). This will limit the time the Internal Revenue Service has to assess additional tax or to begin court action to collect the tax from the date the fiduciary files the request to
Section 6501(d) allows a corporation to file Form 4810 with the IRS requesting a prompt assessment of tax liability. If granted, this request limits the time for assessment to 18 months from the date the request was filed.
Debbie, the sole shareholder of Ancient Corporation’s only class of stock, owns 1,000 shares, which she purchased 15 years ago. Debbie’s basis in the stock is $1 million. During the current year, Ancient, which had earnings and profits of $2.5 million, redeemed 900 shares for $2,250,000. What are the amount and the character of Debbie’s gain?
What is the usual result to the shareholders of a distribution in complete liquidation of a corporation?
Capital gain or loss treatment is the usual result of a distribution received by a shareholder in complete liquidation of a corporation. The gain or loss is long-term or short-term depending on the length of time the stock has been held. The shareholder’s gain or loss is the difference between the amount realized and the basis in the stock.
Houston Corporation distributed marketable securities to Sam Alamo, a shareholder owning 90% of Houston, in redemption of Alamo’s stock. This distribution took place as part of the complete liquidation of Houston. Alamo had contributed the securities 3 years before in a Sec. 351 transaction. On the day the securities were distributed, their adjusted basis was $340,000, and their fair market value was $210,000. What is the tax result to Houston on the distribution date?
A corporation generally recognizes any losses realized on liquidating distributions. Certain realized losses are not recognized when the distribute shareholder is related to the corporation. Applicable distributions include those of assets acquired within 5 years by a contribution to capital or a Sec. 351 exchange. Permanent disallowance of the loss results, even if the decline in value occurred post-contribution. Since Sam Alamo owns 90% of Houston Corporation, he is a related party. The distribution to him of securities contributed in a Sec. 351 transaction within 5 years results in the permanent disallowance of the loss. The realized loss is $130,000 ($340,000 adjusted basis – $210,000 FMV), but the recognized loss must be $0.
| Arnold acquired 10 shares of Klesco, Inc., stock in Year 1 for $50 per share. Klesco, Inc., decided in Year 5 to reacquire all of its outstanding stock, which it did for $200 per share. What amount of capital gain in Year 5 must Arnold report on the redemption of his Klesco, Inc., stock? |
Under Sec. 302(b)(3), if a corporation redeems all of its stock owned by a shareholder, the redemption is treated as a distribution in part or full payment in exchange for the stock. Since Klesco, Inc., decided to redeem all of Arnold’s stock, the $2,000 distribution is treated as a capital gain. The amount of the gain is computed under Sec. 1001 and is the amount by which the distribution exceeds the shareholder’s basis in the stock. In this case, the gain is $1,500 ($2,000 distribution – $500 basis). Because the distribution is treated as being in exchange for the stock and not as a dividend, the amount of the corporation’s earnings and profits is irrelevant. Earnings and profits affect distributions only when those distributions have the character of dividends. |
| Vernon receives a truck from Berry Trucking Company as a distribution in complete liquidation. Vernon’s basis in the stock of Berry Trucking Company is $2,000. The fair market value of the truck on the date of the distribution is $30,000. There is a $15,000 loan on the truck, which Vernon assumed. What is the basis of the truck to Vernon? |
If a shareholder assumes a liability of the liquidating corporation, or receives property that is subject to a liability, then the liability reduces the amount realized by the shareholder, thus reducing the shareholder’s gain or increasing the shareholder’s loss. Nevertheless, the shareholder’s basis for the property is the property’s fair market value, in this case $30,000.
Which of the following statements is true in order for a distribution of corporate assets to be treated as being in exchange for stock in a partial liquidation of a corporation?
A distribution of corporate assets is treated as an exchange for stock in a partial liquidation of a corporation, regardless of whether the stock is actually surrendered.
| Diana, the sole shareholder of Charles Corporation stock, owns 1,000 shares, which she purchased 18 years ago. Diana’s basis in the stock is $2 million. During the current year, Charles, which had earnings and profits of $5 million, redeemed 900 shares for $4.5 million. What are the amount and the character of Diana’s gain? |
Because Diana owns 100% of the stock before and after the redemption, the transaction is a dividend to the extent that Charles Corporation has earnings and profits. Because the distribution ($4.5 million) is less than earnings and profits ($5 million), the entire amount is taxable as a dividend. |
When Paul formed his corporation 5 years ago, he invested $5,000 in corporate stock. In the current year, when his basis in the stock was $10,000, he liquidated his corporation receiving $15,000 cash. How should Paul report this disposal on his return?
Rambo Corporation owns, as an investment, 10% of the stock of Duntulum Corporation with a basis of $8,000 and a fair market value of $50,000. Rambo uses the Duntulum stock to redeem approximately 1%, or $10,000 par value, of its own outstanding stock from unrelated, noncorporate shareholders. As a result of this transaction, Rambo must report
The general rule under Sec. 311(a) is that a corporation does not recognize gain or loss on the distribution of property with respect to its stock. However, Sec. 311(b) requires a corporation that distributes appreciated property to recognize gain equal to the excess of the fair market value of the property over its adjusted basis, as if the stock were sold to the distribute immediately before the exchange. Thus, Rambo’s gain is determined as follows:
FMV of stock distributed | $50,000 |
Less: Adjusted basis | (8,000) |
Recognized gain | $42,000 |
| Daring Corporation, pursuant to a plan of complete liquidation, distributed land acquired 10 years ago to Maria, its sole shareholder. The land had a fair market value of $120,000 and an adjusted basis to Daring of $90,000. It was subject to a liability of $125,000, which was assumed by Maria. Maria owned 500 shares of Daring, which she had purchased 12 years ago for $50,000. Daring does not qualify as a small business corporation. What are the character and the amount of the gain or loss recognized by Maria and Daring Corporation? | |||||||||||||||||||||||||
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The shareholder’s gain or loss is the difference between the amount realized and the basis in the stock. The shareholder must also reduce the gain by any liability assumed by the shareholder. Maria has a $55,000 long-term capital loss from the distribution of the land with a liability ($120,000 amount realized – $50,000 basis – $125,000 liability assumed). The gain or loss will be long-term or short-term depending on the length of time the shareholder held the stock (Sec. 1222). Section 336 also provides that gain or loss is recognized when a corporation distributes property as part of a complete liquidation. The amount received, however, cannot be less than the liability assumed by the shareholder. Thus, Daring Corporation recognizes a gain of $35,000 ($125,000 liability assumed – $90,000 basis). The gain is long-term and capital in nature because the land was a capital asset and was held long-term.
Six years ago, Adam purchased 100 shares of Call Corporation stock for $50 per share. During the current year, Call completely liquidated. After paying its liabilities, Call distributed to its shareholders $10,000 in cash and appreciated property sold for $90,000. Adam’s portion received a liquidating distribution from Call of $10,000. Adam must report what amount of capital gains income from this distribution?
A shareholder treats amounts distributed in complete liquidation as realized in exchange for stock. Capital recovery to the extent of basis is permitted before recognizing gain or loss. Amounts realized include money and the FMV of other distributed property received. Adam should recognize $5,000 of gain ($10,000 value of distribution received – $5,000 basis in stock).
Corporation B had earnings and profits of $550,000 before distributions. Due to economic conditions, B, in partial liquidation, distributed Sec. 1231 property having an adjusted basis to B of $175,000 and a fair market value of $195,000 to Ms. Braun for 95% of her interest in Corporation B. Ms. Braun’s adjusted basis in the stock at the time of the distribution was $180,000. What is the amount of Corporation B’s recognized gain or loss?
If a distribution qualifies as a partial liquidation, sale or exchange treatment results. Corporation B recognizes a gain based on the fair market value of the property. Thus, the corporation recognizes a gain of $20,000 ($195,000 fair market value – $175,000 adjusted basis).
Under a plan of complete liquidation, Bluebird Corporation distributed land, having an adjusted basis to Bluebird of $52,000, to its sole shareholder. The land was subject to a liability of $76,000, which the shareholder assumed for legitimate business purposes. The fair market value of the land on the date of distribution was $70,000. What is the amount of Bluebird Corporation’s recognized gain or loss?
Section 336(a) provides that a corporation should treat a complete liquidation as a sale using the fair market value. However, Sec. 336(b) requires that the fair market value used should not be less than any liability accepted by the distributee. Since Bluebird is transferring property with a liability of $76,000, which is higher than the $70,000 FMV, the $76,000 is used as the new FMV. Therefore, Bluebird Corporation recognizes a $24,000 gain ($76,000 new FMV – $52,000 adjusted basis).
| Individual Y owns 55% of Beta Corporation. Five years ago, Y contributed property with an adjusted basis of $20,000 and a fair market value of $8,000 to Beta in a transaction qualifying under Sec. 351. In the current year, Beta adopted a plan of complete liquidation and distributed this same property to Y. At this time, the property had an adjusted basis of $18,000 and a fair market value of $5,000. How much loss will Beta recognize on the distribution? |
Normally gain or loss is recognized on a liquidating distribution of assets [Sec. 336(a)]. However, under Sec. 336(d)(1), a loss is not recognized in a liquidation on the distribution of property to a related person (which includes a greater-than-50% shareholder) unless the property is distributed to all shareholders on a pro-rata basis and the property was not acquired in a Sec. 351 transactions or contribution to capital during the 5 preceding years (also known as disqualified pro-rated property). Since the distribution was of property acquired in a Sec. 351 transaction within the 5 preceding years, no loss is recognized on the distribution of the disqualified property to the related person. The fact that the distribution was not pro rata does not affect the ability to recognize the loss.
| Shepherd Corporation had earnings and profits of $500,000 before distributions. Due to economic conditions, Shepherd, in partial liquidation, distributed land having an adjusted basis to Shepherd of $67,500 and a fair market value of $75,000 to Ms. Rinnie for 95% of her interest in Shepherd. Ms. Rinnie’s adjusted basis in the stock at the time of the distribution was $90,000. What is the amount of Shepherd Corporation’s recognized gain or loss? |
Since the corporation makes an in-kind distribution of property whose fair market value ($75,000) exceeds its basis ($67,500), the corporation will recognize a gain of $7,500 as if it had sold the property to the shareholder at its fair market value.
Wargo Corporation has two equal shareholders, Karen and Bob. Each shareholder owns 10 shares of Wargo stock and has owned the stock for several years. Each share has a $100 basis and a $150 FMV. Wargo, which has sufficient E&P, redeems five shares from each shareholder at the $150 FMV. What income, if any, do Karen and Bob each recognize as a result of the redemption of Wargo Corporation stock?
Since the distribution is proportionate among the shareholders, it is not a redemption of stock and is treated as a dividend. Each shareholder would report $750 as dividend income (5 shares × $150 per share).
The Z Corporation’s common stock is owned by the following individuals and corporations:
The B family does not own any of T or X Corporation’s stock. Mr. B would like to redeem some of his shares and have the redemption treated as an exchange. The minimum number of Mr. B’s shares that Z Corporation must redeem in order for the redemption to qualify for exchange treatment under the substantially disproportionate rules of Sec. 302(b)(2) is (rounded to the nearest share) | ||||||||||||
In order to meet the substantially disproportionate rules of Sec. 302, two conditions must be met.
Keep in mind that the total number of shares reduces when the corporation buys back stock. The shareholder already has less than 50% of the stock, including stock owned by related taxpayers. Thus, we are only looking at the first requirement. X is the number of shares to be redeemed. The shareholders’ percentage after the redemption is (40 – X) divided by (100 – X); that percentage must be less than (40 ÷ 100) × 80% = 32%,
After the redemption, Mr. and Mrs. B will have 28 shares, which is 31.82%. They had 40% before the redemption, so 80% of 40% = 32%. | |||||||||||||||
Danger Corporation’s only class of stock is owned as follows:
Mike | 40% |
Kim, Mike’s sister | 25% |
Mike and Kim’s father | 10% |
Mike and Kim’s uncle | 25% |
What is Mike’s percentage of stock ownership under the attribution rules for stock redemption?
An individual is treated as constructively owning stock owned directly or indirectly by his or her spouse, children, grandchildren, and parents (excludes siblings and grandparents). Thus, Mike is treated as owning his shares (40%) and his father’s (10%).
| Krol Corporation distributed marketable securities in the redemption of its stock in a complete liquidation. On the date of distribution, these securities had a basis of $100,000 and a fair market value of $150,000. What gain does Krol have as a result of the distribution? |
Section 336 provides that gain or loss is recognized when a corporation distributes property as part of a complete liquidation. Therefore, Krol Corporation will recognize a $50,000 ($150,000 – $100,000) gain. It is a capital gain because the marketable securities are a capital asset.
| In Year 1, Mark purchased 100 shares of Roman, Inc., for $10 per share. In Year 5, Roman completely liquidated and distributed $8,000 to Mark. Mark must report income from this distribution as |
Corporation Z completely liquidated in October of the current year, at which time Z made a liquidating distribution to its shareholders. The property distributed was subject to a liability of $40,000 and had a fair market value of $360,000. Z’s adjusted basis in the property at the time of the distribution was $120,000. What is the amount of Corporation Z’s gain?
A corporation recognizes any gain or loss realized on distributions in complete liquidation as if the property were sold at its fair market value to the shareholder immediately before its distribution. Corporation Z’s gain is $240,000 ($360,000 FMV – $120,000 adjusted basis).
| A corporation was completely liquidated and dissolved during the current year. The filing fees, professional fees, and other expenditures incurred in connection with the liquidation and dissolution are |
The filing fees, professional fees, and other liquidation-related expenses are deductible in the final tax return of the corporation under Sec. 162(a).
| Mary, an individual shareholder, owns 125 shares of West Corporation. West Corporation has 500 shares of common stock outstanding. If West Corporation redeems 100 shares of common stock from its shareholders, what is the least number of Mary’s shares that will need to be redeemed in order for the redemption to be substantially disproportionate to Mary? | |
Substantially disproportionate means that the amount received by shareholders is not in the same proportion as their stock holdings. In order for a redemption to qualify as substantially disproportionate, immediately after the redemption the shareholder must own less than 50% of the voting power of outstanding voting stock and less than 80% of interest in both the common stock and voting stock owned before the redemption by the shareholder. Mary owned 25% of West Corporation before the redemption (125 ÷ 500). Mary must reduce her interest to below 20% for the redemption to be substantially disproportionate (80% × 25%). Mary needs to own less than 80 shares after the redemption (400 × 20%). Thus, more than 45 shares need to be redeemed to reduce Mary’s interest below 20% (125 – 80). Accordingly, Mary needs to have a minimum of 46 shares redeemed for the redemption to be substantially disproportionate.
| T, an individual shareholder, owned 25% of the Towne Corporation stock. Pursuant to a series of stock redemptions, Towne redeemed 10% of the shares of stock T owned in exchange for land having a fair market value of $30,000 and an adjusted basis of $10,000. T’s basis for all of his Towne stock was $200,000. T reported the redemption transaction as if it were a dividend. T’s basis in the land and his Towne stock (immediately after the redemption) is | |
Under Sec. 302, if a redemption of shares does not qualify as a sale or exchange, it is treated as a dividend under Sec. 301. Section 301(b)(1) provides that the amount of a dividend distribution is the amount of money received plus the fair market value of the property received, so T has a $30,000 dividend. Section 301(d) provides that the basis of property received in a distribution will be the fair market value of such property. Therefore, T’s basis in the land is $30,000. A dividend distribution does not affect the basis in a shareholder’s stock, so the basis in the stock T holds after the redemption is $200,000 [Reg. 1.302-2(c)].
Belle Corporation owns as an investment 10% of the stock of Ton Corporation, with an adjusted basis of $4,000 and a fair market value of $44,000. Belle uses the Ton stock to redeem approximately 1%, or $10,000 par value, of its own outstanding stock from unrelated, noncorporate shareholders. As a result of this transaction, Belle must report a gain of
A corporation that distributes property in redemption of its stock generally recognizes gain, but not loss, if it pays all or part of the redemption price by transferring property whose fair market value exceeds its basis to the corporation. Thus, Belle Corporation must recognize the $40,000 gain inherent in the difference between the value of the Ton stock ($44,000) and its basis ($4,000).
Sky Corporation is a C corporation. Jake owns 80% of all the outstanding shares of Sky Corporation stock. In Year 1, Jake advanced funds to Sky Corporation as a loan. The loan instrument executed between Jake and Sky Corporation is a demand note. The principal balance due on the loan from Sky Corporation is $300,000. After Jake demanded repayment of the outstanding loan on March 20, Year 7, Sky Corporation transferred to Jake preferred stock with a fair market value of $325,000 in settlement of the debt. Jake has the right to require Sky Corporation to redeem the preferred stock. Which of the following is true?
Jake loaned Sky Corporation $300,000. He received $325,000 upon repayment of the debt. Therefore, he must recognize $25,000 as income.
| Lagard Corporation, under a plan of complete liquidation, distributed to its sole shareholder, Sandra, property with an adjusted basis to Lagard of $34,000 and subject to a liability of $44,000. The fair market value of the property on the date of distribution was $40,000. What is the amount of Lagard’s recognized gain or loss? |
Mr. Doe owns 520 shares of stock in River Corporation, which represents 52% of River’s only class of stock issued and outstanding. Mr. Doe’s basis in the stock is $52,000 ($100 per share). River redeems 260 shares of Mr. Doe’s stock for $39,000. The redemption is properly treated as a distribution of cash in exchange for the stock. What is Mr. Doe’s basis in his remaining shares of stock?
The shareholder’s basis in his or her remaining stock depends on the treatment of the distribution. If the distribution is essentially equivalent to a dividend, the shareholder’s basis in the remaining stock will be increased by the basis of the stock that is redeemed [Reg. 1.302-2(c)]. If the distribution is treated as payment in exchange for the shareholder’s redeemed stock, the basis of the redeemed stock offsets the amount received by the shareholder, and the basis of the remaining shares is unchanged. Section 302 governs the determination of the distribution’s character. Since Mr. Doe still owns River stock after the redemption, a complete termination under Sec. 302(b)(3) did not occur. The best choice from the remaining alternatives is the substantially disproportionate redemption test of Sec. 302(b)(2), which requires that immediately after the redemption the shareholder own less than 50% of the total combined voting power of all classes of voting stock. Since 1,000 shares are outstanding before redemption (520 ÷ 52%), 35% of the River stock is owned by Doe after the redemption [(520 – 260) ÷ (1,000 – 260)]. A second requirement for Sec. 302(b)(2) treatment is that the percentage of stock ownership after the redemption be less than 80% of the percentage ownership immediately before the redemption (80% × 52% = 41.6%; 35% < 41.6%). Therefore, the redemption is substantially disproportionate and is considered a sale. Hence, the basis is $26,000 (260 remaining shares × $100 per share).
| Lantern Corporation is in the process of dissolving and has filed a request with the IRS for a prompt assessment. Assuming all other requirements are met, if the request is granted, the period within which the IRS may assess a tax liability is shortened to how many months? |
Form 4810 states, “The fiduciary representing a dissolving corporation or a decedent’s estate may request a prompt assessment of tax under the Internal Revenue Code (IRC) Sec. 6501(d). This will limit the time to 18 months from the date the fiduciary files the request.”
| Select the answer that best describes what happens when shareholders receive a series of distributions, not part of an installment obligation, covering 2 or more consecutive tax years in redemption of all of the stock of a corporation pursuant to a plan intended to result in the complete liquidation of the corporation. |
Robert owns 100 shares of Oswald, Inc., stock he purchased 7 years ago for $10 per share. The 100 shares that Robert owns represent all of the outstanding Oswald stock. In the current year, Oswald redeems 25 of Robert’s shares for $50 per share. Oswald had earnings and profits in the current year of $100,000. Robert must report what amount of capital gain from this current year redemption of his Oswald stock?
Stock is redeemed when a corporation acquires its own stock from a shareholder in exchange for property. The redemption occurs regardless of whether the stock is canceled, retired, or held as treasury stock. A shareholder is required to treat the amount realized on a redemption (not in liquidation) as either a distribution (a corporate dividend) or a sale of the stock redeemed. Redemptions of stock by a corporation are treated as dividends unless certain conditions are met. If the distribution is not in complete redemption of all of a shareholder’s stock in the corporation, the distribution is treated as a dividend. Since only 25% of Robert’s shares were redeemed, the distribution is treated as a dividend and no capital gain is reported.
| Art, Betty, and Cora are equal partners in ABC Partnership. ABC Partnership and Betty are the only two shareholders in Angel, Inc., with direct ownership of 60% and 40%, respectively. Based upon the constructive-ownership rules for stock redemptions, what are ABC’s and Betty’s percentages of constructive ownership of Angel? | |||||||||||||||||||||||||
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| LuAnn owns 40% of Glacier Corporation. Her parents, Roger and Roberta, respectively own 25% and 15% of Glacier’s stock. Roger and Roberta are separated under a legal separate maintenance agreement. LuAnn’s son, Nicholas, owns the remaining 20% of Glacier’s outstanding stock. Under the attribution rules for stock redemptions, what are Roger’s and Nicholas’s respective ownership percentages? | ||||||||||||||||||||
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Under Sec. 318, a shareholder is considered to constructively own stock that is in fact owned by another shareholder. Section 318(a)(1)(A) states that a shareholder is considered to own the stock owned by the shareholder’s spouse, children, grandchildren, and parents (excludes siblings and grandparents). However, Sec. 318(a)(1)(A) excludes a spouse who is legally separated from the shareholder. Therefore, Roger owns 85% (25% Roger’s stock + 40% LuAnn’s stock + 20% Nicholas’s stock), and Nicholas owns 60% (20% Nicholas’s stock + 40% LuAnn’s stock).
| A stock redemption is the acquisition by a corporation of its stock from a shareholder. A shareholder who owns all of the stock of a corporation sells back one half of his stock for cash. Assume that the current E&P is greater than the redemption amount. Which of the following statements is true with regard to this stock redemption? |
Stock is redeemed when a corporation acquires its own stock from a shareholder in exchange for property. The redemption occurs whether or not the stock is canceled, retired, or held as treasury stock. A shareholder is required to treat amounts realized on a redemption (not in liquidation) either as a distribution (a corporate dividend) or as a sale of the stock redeemed. Because the shareholder owns 100% of the stock before and after the redemption, the transaction is a dividend to the extent that the corporation has earnings and profits. |
Elm Corp. is an accrual-basis, calendar-year C corporation with 100,000 shares of voting common stock issued and outstanding as of December 28 of the current year. On Friday, December 29, Hall surrendered 2,000 shares of Elm stock to Elm in exchange for $33,000 cash. Hall had no direct or indirect interest in Elm after the stock surrender. Additional information follows:
What amount of income did Hall recognize from the stock surrender? |
A redemption is considered substantially disproportionate with respect to a shareholder if, immediately after redemption, the shareholder owns
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| During the current year, Corporation T distributed machinery, having a fair market value of $300,000 and an adjusted basis to T of $150,000, to Mr. K in exchange for 85% of K’s interest in T. This distribution was under a plan of partial liquidation that resulted in a contraction of the business. K’s adjusted basis in the stock exchanged with T was $180,000. T had an earnings and profit balance of $500,000 prior to the partial liquidation. What are the character and the amount of Mr. K’s recognized gain on the distribution? |
Under Sec. 302(b)(4), a redemption of an interest held by a noncorporate shareholder made in partial liquidation of the corporation is treated as a distribution in exchange for the stock. The shareholder will treat any gain on the redemption as a capital gain. The amount of the gain is computed under Sec. 1001. Under Sec. 301(b)(1), the amount of the distribution is the fair market value of the property. Mr. K will recognize a gain of $120,000 on the distribution ($300,000 fair market value of the distributed property – $180,000 basis in the stock). The gain is treated as capital gain.
Under a plan of complete liquidation, Jayhawk Corporation distributed land, having an adjusted basis of $104,000, to its sole shareholder. The land was subject to a liability of $152,000, which the shareholder assumed for legitimate business purposes. The fair market value of the land on the date of distribution was $140,000. What is the amount of Jayhawk Corporation’s recognized gain or loss?
| Mr. X owned 40% of Corporation B’s only class of stock outstanding. The remaining 60% of B’s stock was owned by Mr. Y (not related to Mr. X). Corporation B redeemed all of X’s stock for $75,000 and one-half of Y’s stock for $50,000. Mr. X’s and Mr. Y’s bases in their stock of Corporation B were $30,000 and $25,000, respectively. B’s earnings and profits were $200,000. Assuming that no partial liquidation occurred, what are the amount and the character of X’s and Y’s recognized gains? | |||||||||||||||||||||||||
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Under Sec. 302(b)(3), if a corporation redeems all of its stock owned by a shareholder, the shareholder is treated as having sold his stock to the corporation and will report a capital gain to the extent that the distribution exceeds his basis in the stock. Therefore, Mr. X has a capital gain of $45,000 ($75,000 distribution – $30,000 basis). Mr. Y does not qualify under the redemption rules and must recognize the entire $50,000 as dividend income. If the distribution is not a redemption of all the shareholder’s stock, Sec. 302(b)(2) must be applied to determine whether the distribution will be treated as a payment in exchange for the stock or as a dividend. One of the requirements of Sec. 302(b)(2) is that the shareholder must own less than 50% of the total combined voting power of all classes of stock immediately after the redemption. Alternatively, the distribution must be not essentially equivalent to a dividend under Sec. 302(b)(1). This alternative requires a meaningful reduction in the shareholder’s interest in the distributing corporation. Since all of Mr. X’s stock was redeemed, Mr. Y owns 100% of the voting stock. Therefore, the requirements of Secs. 302(b)(2) or 302(b)(1) are not met, and the $50,000 distribution is treated as a dividend since it is less than B Corporation’s earnings and profits.
Ann owned two blocks of Lou Corporation stock, which had the following characteristics:
Block | Shares | Acquired | Basis |
1 | 200 | 6/01/Yr 1 | $20,000 |
2 | 50 | 7/01/Yr 2 | 12,500 |
Ann’s two blocks of stock combined represented 10% of Lou Corporation’s outstanding stock. Pursuant to Lou’s complete liquidation, Ann received a $50,000 cash distribution on December 1, Year 2, in exchange for her 250 shares. Lou’s earnings and profits balance immediately before any liquidating distributions was $50,000. What are the amount and the character of Ann’s gain or loss?
Section 331 provides capital gain or loss treatment for distributions received by a shareholder in complete liquidation of a corporation. The gain or loss will be long-term or short-term, depending on the length of time the stock has been held (Sec. 1222).
The shareholder’s gain or loss is the difference between the amount realized and the basis in the stock. The amount realized by Ann is $200 per share ($50,000 distribution ÷ 250 shares owned). The sale of Block 1 produces a gain of $20,000 [200 shares × ($200 selling price – $100 per share basis)]. The gain is long-term because the stock was held for more than 1 year. The sale of Block 2 produces a loss of $2,500 [50 shares × ($250 per share basis – $200 per share selling price)]. The loss is short-term because the stock was held less than 1 year.
| Mr. Fox owns 500 shares of stock in Ocean Corporation, which represents 52% of Ocean’s only class of stock issued and outstanding. Mr. Fox’s basis in the stock is $50,000 ($100 per share). Ocean redeems 250 shares of Mr. Fox’s stock for $40,000. The redemption is properly treated as a distribution of cash in exchange for the stock. What is Mr. Fox’s basis in his remaining shares of stock? |
The shareholder’s basis in his remaining stock depends on the treatment of the distribution. If the distribution is essentially equivalent to a dividend, the shareholder’s basis in the remaining stock will be increased by the basis of the stock that is redeemed [Reg. 1.302-2(c)]. If the distribution is treated as payment in exchange for the shareholder’s redeemed stock, the basis of the redeemed stock offsets the amount received by the shareholder, and the basis of the remaining shares is unchanged. Section 302 governs the determination of the distribution’s character. Since Fox still owns Ocean stock after the redemption, a complete termination under Sec. 302(b)(3) did not occur. The best choice from the remaining alternatives is the substantially disproportionate redemption test of Sec. 302(b)(2), which requires that immediately after the redemption the shareholder own less than 50% of the total combined voting power of all classes of voting stock. Since approximately 961 shares are outstanding before redemption (500 ÷ 52% = 961.5), 35% of the Ocean stock is owned by Fox after the redemption [(500 – 250) ÷ (961 – 250) = 35%]. A second requirement for Sec. 302(b)(2) treatment is that the percentage of stock ownership after the redemption be less than 80% of the percentage ownership immediately before the redemption (80% × 52% = 41.6%; 35% < 41.6%). Therefore, the redemption is substantially disproportionate and is considered a sale. Hence, the basis is $25,000 (250 remaining shares × $100 per share).
Ranger Corporation’s only class of stock is owned as follows:
What is Matthew’s percentage of stock ownership under the attribution rules for stock redemption? | |||||||||
An individual is treated as constructively owning stock owned directly or indirectly by his or her spouse, children, grandchildren, and parents. Thus, Matthew is treated as owning his shares (40%) and his father’s shares (25%).
