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Exam 13: Corporate Nonliquidating and Liquidating Distributions

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Question 1

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Crystal,Inc.is owned equally by John and his wife Arlene,each of whom own 500 shares in the company.Arlene wants to reduce her ownership in the company,and it was decided that the company will redeem 200 of her shares for $5,000 per share on December 31,year 1.Arlene's income tax basis in each share is $1,000.Crystal has current E&P of $1,000,000 and accumulated E&P of $3,000,000.What is the amount and character (capital gain or dividend)recognized by Arlene as a result of the stock redemption,assuming only the "substantially disproportionate with respect to the shareholder" test is applied?

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$1,000,000 dividend. Arlene reduces her ...

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Question 2

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Terrapin Corporation incurs federal income taxes of $250,000 in year 1.Terrapin deducts the federal income taxes in computing its current earnings and profits for year 1.

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Tiger Corporation,a privately held company,has one class of voting common stock,of which 1,000 shares are issued and outstanding.The shares are owned as follows: $\begin{array}{lccc} \text {Mark Bird } & 300 \\ \text { Connie Bird (Mark's wife) } & 250\\ \text { Bonnie Bird (Mark's daughter) } & 200\\ \text { Billy Bird (Mark's brother) } & \underline {250}\\ \text { Total } & \underline {1000}\\\end{array}$   How many shares of stock is Mark deemed to own under the family attribution rules in a stock redemption?

Which of the following statements best describes current earnings and profits?

Stock distributions are always nontaxable to the recipient.

Crescent Corporation is owned equally by George and his daughter Olympia,each of whom own 100 shares in the company.George wants to retire from the company,and it was decided that the company will redeem all 100 of his shares for $10,000 per share on December 31,year 1.George's income tax basis in each share is $2,000.Crescent has current E&P of $1,000,000 and accumulated E&P of $5,000,000.What must George do to ensure that the redemption will be treated as an exchange?

Robin transferred her 60 percent interest to Cardinal Company as part of a complete liquidation of the company.In the exchange she received land with a fair market value of $800,000.Robin's basis in the Cardinal stock was $900,000.The land had a basis to Cardinal Company of $1,000,000.What amount of loss does Cardinal recognize in the exchange and what is Robin's basis in the land she receives? The distribution was non pro rata to Robin,a related person.

Pine Creek Company is owned equally by Bob and his sister Samantha,each of whom own 1,000 shares in the company.On December 31,year 1,Pine Creek redeemed 200 of Samantha's shares for $5,000,000 in a transaction treated as an exchange by Samantha.Pine Creek has current E&P of $10,000,000 and accumulated E&P of $30,000,000 (computed without regard to the stock redemption).Assuming Pine Creek did not make any dividend distributions during year 1,by what amount does the company reduce its E&P as a result of the redemption?

Evergreen Corporation distributes land with a fair market value of $50,000 to its sole shareholder.Evergreen's tax basis in the land is $200,000.Evergreen will report a loss of $150,000 on the distribution regardless of whether its earnings and profits are positive or negative.

A calendar-year corporation has negative current E&P of $500 and accumulated positive E&P of $1,000.The corporation makes a $600 distribution to its sole shareholder.Which of the following statements is true?

Wildcat Corporation reports current E&P of negative $200,000 in year 1 and accumulated E&P at the beginning of the year of $100,000.Wildcat distributed $300,000 to its sole shareholder on December 31,year 1.How much of the distribution is treated as a dividend in year 1?

The tax basis of property received by a noncorporate shareholder in a complete liquidating will be the property's fair market value.

Billie transferred her 20 percent interest to Jean Company as part of a complete liquidation of the company.In the exchange she received land with a fair market value of $200,000.Billie's basis in the Jean stock was $100,000.The land had a basis to Jean Company of $400,000.What amount of loss does Jean recognize in the exchange and what is Billie's basis in the land she receives? Billie is not considered a related party to Jean Company.

A distribution from a corporation to a shareholder will only be treated as a dividend for tax purposes if the distribution is paid out of current and/or accumulated earnings and profits.

Cavalier Corporation had current and accumulated E&P of $500,000 at December 31 year 1.On December 31,the company made a distribution of land to its sole shareholder,Tom Jefferson.The land's fair market value was $200,000 and its tax and E&P basis to Cavalier was $50,000.The tax consequences of the distribution to Cavalier in year 1 would be (assume a 0 percent marginal tax rate for Cavalier) :

Lansing Company is owned equally by Jennifer,her husband Dan,and DeWitt Corporation,which is owned 50 percent by Jennifer and her sister Jane.Each of the three shareholders holds 100 shares in the company.Under the §318 stock attribution rules,how many shares of Lansing stock is Jennifer deemed to own?

Sweetwater Corporation declared a stock dividend to all common stock shareholders of record on December 31,year 1.Shareholders will receive 1 share of Sweetwater common stock for each 5 shares of common stock they already own.Pierre Dorgan owns 500 shares of Sweetwater common stock with a tax basis of $150 per share.The fair market value of the Sweetwater common stock was $90 per share on December 31.What is Pierre's income tax basis in his new and existing common stock in Sweetwater,assuming the distribution is non-taxable?

Packard Corporation transferred its 100 percent interest to State Company as part of a complete liquidation of the company.In the exchange Packard received land with a fair market value of $300,000.Packard's basis in the State stock was $600,000.The land had a basis to State Company of $500,000.What amount of loss does State recognize in the exchange and what is Packard's basis in the land it receives?

Austin Company reports positive current E&P of $200,000 and negative accumulated E&P of $300,000.Austin distributed $250,000 to its sole shareholder,Betsy Bevo,on December 31,year 1.Betsy's tax basis in her stock is $125,000.How much of the $250,000 distribution is treated as a dividend to Betsy and what is her tax basis in Austin stock after the distribution?

Brothers and sisters are considered "family" under the stock attribution rules that apply to stock redemptions.