The Code treats corporate distributions

485. TF
The Code treats corporate distributions that are a return froma shareholder’s investment as sales or exchanges and corporate distributions that are a return of a shareholder’s investment as dividends.

a. True
b. False

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486. 2
For tax purposes, all stock redemptions are treated as dividend distributions.

a. True
b. False

487. 3
Noncorporate shareholders generally prefer a nonqualified stock redemption over a qualifying stock redemption due to the availability of the dividends received deduction.

a. True
b. False

488. 4
A shareholder’s basis in property received in a stock redemption is the property’s fair market value.

a. True
b. False

489. 5
A shareholder’s holding period of property acquired in a stock redemption begins on the date of the distribution.

a. True
b. False

490. 6
Vireo Corporation redeemed shares from its sole shareholder pursuant to a written agreement between the parties that clearly identified the transaction as a stock redemption (and not a dividend distribution). Since the agreement is binding under state law, the shareholder will receive sale or exchange treatment with respect to the redemption.

a. True
b. False

491. 7
In applying the stock attribution rules to a stock redemption, stock owned by a shareholder who owns 65% of a corporation is deemed to be owned in full by the corporation.

a. True
b. False

492. 8
In a not essentially equivalent redemption [§ 302(b)(1)], the meaningful reduction test is an objective safe harbor rule that taxpayers can rely upon for sale or exchange treatment.

a. True
b. False

493. 9
As a result of a redemption, a shareholder’s interest (direct and indirect) in the corporation decreased from 58% to 45%. The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

a. True
b. False

494. 10
Puffin Corporation’s 2,000 shares outstanding are owned as follows: Paul, 800 shares; Sandra (Paul’s sister), 800 shares; and Greta (Paul’s granddaughter), 400 shares. During the current year, Puffin (E & P of $1 million) redeemed 600 shares of Paul’s stock for $100,000. If Paul had acquired the 600 shares five years ago for $30,000, he will have a long-term capital gain of $70,000 from the redemption.

a. True
b. False

495. 11
Sally and her mother are the sole shareholders of Owl Corporation. During the current year, Owl distributes cash in redemption of all of Sally’s stock. Sally continues to be employed as controller for Owl after the redemption. The distribution is a complete termination redemption resulting in sale or exchange treatment for Sally.

a. True
b. False

496. 12
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. The loan to Robin Corporation constitutes a prohibited interest for purposes of the family attribution waiver.

a. True
b. False

497. 13
In 2008, 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 2011, Floyd receives stock in Gray Corporation as a gift from his father. Floyd has acquired a prohibited interest within the 10-year postredemption period and, as a result, the 2008 redemption no longer qualifies as a complete termination redemption.

a. True
b. False

498. 14
For purposes of a partial liquidation, the “not essentially equivalent to a dividend” test is applied at the corporate level.

a. True
b. False

499. 15
A partial liquidation cannot result in sale or exchange treatment to a shareholder if it results in a pro rata stock redemption.

a. True
b. False

500. 16
To qualify a partial liquidation under the termination of a business test, the distribution must consist of the proceeds from the sale of a qualified trade or business.

a. True
b. False

501. 17
For a stock redemption to qualify for sale or exchange treatment under § 303 (redemption to pay death taxes), it need not satisfy any of the § 302 redemption provisions.

a. True
b. False

502. 18
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.

a. True
b. False

503. 19
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.

a. True
b. False

504. 20
Grackle Corporation (E & P of $600,000) distributes cash of $200,000 and land (fair market value of $400,000; basis of $250,000) to a shareholder in a qualifying stock redemption. The land distributed is subject to a mortgage of $460,000. Grackle will recognize a gain of $150,000 as a result of the distribution.

a. True
b. False

505. 21
At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding, the corporation distributed $300,000 to redeem 400 shares of its stock. The transaction qualified as a disproportionate redemption for the shareholder. Blackbird’s E & P is reduced by $280,000 as a result of the distribution.

a. True
b. False

506. 22
Swan Corporation incurred $10,000 of accounting fees and $15,000 of legal fees in connection with the redemption of stock from its shareholders. None of the expenditures are deductible by Swan.

a. True
b. False

507. 23
In the current year, Donovan sells to an unrelated individual 500 shares of preferred stock in Flamingo Corporation for $15,000. Donovan received the preferred stock in a nontaxable stock dividend four years ago from Flamingo (E & P of $700,000). At that time, the preferred stock had a fair market value of $45,000, and $20,000 of common stock basis was properly allocated to the preferred stock. Donovan will recognize a $5,000 loss as a result of the sale of the preferred stock.

a. True
b. False

508. 24
Tammy forms White Corporation in a transaction qualifying under § 351. In that transaction, Tammy transferred cash and equipment in exchange for White Corporation common (1,000 shares) and preferred (200 shares) stock. The preferred stock is § 306 stock for Tammy.

a. True
b. False

509. 25
Three years ago, Darlene received preferred (§ 306) stock pursuant to a nontaxable stock dividend from Grackle Corporation. In the current year, Darlene gives the Grackle preferred stock to her sister, Nancy. The Grackle preferred stock is not § 306 stock with regards to Nancy.

a. True
b. False

510. 26
For purposes of the application of § 304 (redemptions through the use of related corporations), a shareholder must own (direct or indirectly) at least 80% of the stock of two more corporations.

a. True
b. False

511. 27
Abel owns all the stock of both Beige Corporation and Brown Corporation. Both corporations have significant amounts of E & P. Abel sells some of his stock in Beige to Brown Corporation. Abel will have dividend income as a result of the sale of Beige stock.

a. True
b. False

512. 28
Legal dissolution under state law is not required for a liquidation to be complete for tax purposes.

a. True
b. False

513. 29
One difference between the tax treatment accorded nonliquidating and liquidating distributions is with respect to the recognition of losses by the distributing corporation. As a general rule, a corporation recognizes losses on liquidating distributions of depreciated property (fair market value less than basis) but not on nonliquidating distributions of such property.

a. True
b. False

514. 30
As a general rule, a liquidating corporation recognizes gains and losses on the distribution of property in complete liquidation.

a. True
b. False

515. 31
The related-party loss limitation does not apply to a distribution of property in complete liquidation that was appreciated (fair market value greater than basis) when it was transferred to the corporation.

a. True
b. False

516. 32
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.

a. True
b. False

517. 33
The related-party loss limitation in a complete liquidation can apply to a distribution or sale of property while the built-in loss limitation applies only to distributions of property.

a. True
b. False

518. 34
When a shareholder receives property subject to a liability pursuant to a complete liquidation (not a parent-subsidiary liquidation), the fair market value of the property is reduced by the amount of the liability in computing the shareholder’s gain (or loss) on the liquidation.

a. True
b. False

519. 35
Shareholders may defer gain, to the point of collection, on a liquidating distribution of installment notes obtained by the corporation in the sale of its assets.

a. True
b. False

520. 36
Section 332 does not apply to a parent-subsidiary liquidation if the subsidiary corporation is insolvent on the date of the liquidation.

a. True
b. False

521. 37
If a liquidation qualifies under § 332, any minority shareholder will recognize gain (but not loss) equal to the difference between the fair market value of assets received and the basis of the shareholder’s stock.

a. True
b. False

522. 38
A subsidiary corporation is liquidated at a time when it is indebted to its parent corporation. The subsidiary corporation distributes property to the parent corporation in satisfaction of the indebtedness. If the liquidation is governed by § 332, neither the subsidiary nor the parent recognize gain or loss on the transfer of property in satisfaction of indebtedness.

a. True
b. False

523. 39
Brown Corporation purchased 85% of the stock of Green Corporation five years ago for $850,000. In the current year, Brown Corporation liquidates Green Corporation and acquires assets with a basis to Green Corporation of $700,000 (fair market value of $1.1 million). Brown Corporation will have a basis in the assets of $700,000, the same as Green’s basis in the assets.

a. True
b. False

524. 40
Sparrow Corporation purchased 90% of the stock of Warbler Corporation eight years ago for $1 million. In the current year, Sparrow liquidates Warbler and acquires assets with a basis to Warbler of $850,000 (fair market value of $1.2 million). Sparrow will have a basis in the assets of $850,000 (Warbler’s basis in the assets), and a recognized loss of $150,000 ($1 million basis in Warbler stock – $850,000 carryover basis in assets).

a. True
b. False

525. 41
A subsidiary is liquidated pursuant to § 332. The parent has held 100% of the stock in the subsidiary for the past ten years. The subsidiary has E & P of $600,000 at the time of liquidation. The subsidiary’s E & P disappears as a result of the liquidation.

a. True
b. False

526. 42
For purposes of the § 338 election, a corporation must acquire, in a taxable transaction, at least 80% of the stock (voting power and value) of another corporation within an 12-month period.

a. True
b. False

527. 43
A parent corporation must make the § 338 election by the fifteenth day of the third month following the close of the tax year in which a qualified stock purchase occurs.

a. True
b. False

528. 44
If a parent corporation makes a § 338 election, the subsidiary recognizes gains and losses as result of a deemed sale of its assets.

a. True
b. False

529. 45
One advantage of acquiring a corporation via an asset purchase instead of a stock purchase is that an asset purchase avoids the transfer of the acquired corporation’s liabilities.

a. True
b. False