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Exam 14: Corporate Nonliquidating and Liquidating Distributions

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Question 21

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Paladin Corporation transferred its 90 percent interest to Furman Company as part of a complete liquidation of the company. In the exchange, Paladin received land with a fair market value of $1,000,000. The corporation's basis in the Furman Company stock was $400,000. The land had a basis to Furman Company of $200,000. What amount of gain does Paladin recognize in the exchange and what is its basis in the land it receives?

A) $600,000 gain recognized and a basis in the land of $1,000,000
B) $600,000 gain recognized and a basis in the land of $400,000
C) No gain recognized and a basis in the land of $400,000
D) No gain recognized and a basis in the land of $200,000

E) All of the above
F) A) and C)

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Question 22

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Wonder Corporation declared a common stock distribution to all shareholders of record on September 30, year 1. Shareholders will receive three shares of Wonder stock for each five shares of stock they already own. Diana owns 300 shares of Wonder stock with a tax basis of $90 per share (a total basis of $27,000) . The fair market value of the Wonder stock was $180 per share on September 30, year 1. What are the tax consequences of the stock distribution to Diana?

A) $0 dividend income and a tax basis in the new stock of $180 per share
B) $0 dividend income and a tax basis in the new stock of $67.50 per share
C) $0 dividend income and a tax basis in the new stock of $56.25 per share
D) $10,800 dividend and a tax basis in the new stock of $180 per share

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

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Question 23

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The recipient of a taxable stock distribution will have a tax basis in the stock equal to the fair market value of the stock received.

Which of the following individuals is not considered "family" for purposes of applying the stock attribution rules to a stock redemption?

Goose Company is owned equally by Val and her sister Eugenia, each of whom own 500 shares in the company. Val wants to reduce her ownership in the company and have the transaction treated as an exchange for tax purposes. Determine the minimum amount of stock that Goose must redeem from Val for her to treat the redemption as being "substantially disproportionate with respect to the shareholder" and receive exchange treatment.

The "double taxation" of corporate income refers to the fact that corporate income is taxed at both the entity-level and the shareholder-level.

Superior Corporation reported taxable income of $1,000,000 in year 1. Superior paid a dividend of $100,000 to its sole shareholder, Mary Yooper. Superior Corporation is subject to a flat rate tax of 34%. The dividend meets the requirements to be a "qualified dividend" and Mary is subject to a tax rate of 15% on the dividend. What is the total federal income tax imposed on the corporate income earned by Superior and distributed to Mary as a dividend?

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.

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: $\begin{array} { | l | r | r | r | } \hline & \text { FMV } & \text { Tax Basis } & \text { Appreciation } \\\hline \text { Cash } & \$ 400,000 & \$ 400,000 & \\\hline \text { Building } & 100,000 & 20,000 & 80,000 \\\hline \text { Land } & \underline { 300,000 } & \underline { 180,000 } & 120,000 \\\hline \text { Total } & \$ 800,000 & \$ 600,000 & \$ 200,000 \\\hline\end{array}$ How many shares of stock is Mark deemed to own under the family attribution rules in a stock redemption?

Oriole, Inc. decided to liquidate its wholly-owned subsidiary, Tiger Corporation. Tiger had the following tax accounting balance sheet. $\begin{array} { | l | r | } \hline \text { Taxable income from operations } & \$ 700,000 \\\hline \text { Gain on distribution of land } ( \$ 125,000 - \$ 75,000 ) & 50,000 \\\hline \text { Total taxable income } & \$ 750,000 \\\hline \text { Federal income tax } ( \$ 750,000 \times 34 \% ) & ( 255,000 ) \\\hline \text { Taxable income } & \$ 750,000 \\\hline \text { Subtract: } & \\\hline \text { Federal income tax } & \$ 255,000 ) \\\hline \text { Current E \&P } & \$ 495,000 \\\hline\end{array}$ a. What amount of gain or loss does Tiger recognize in the complete liquidation? b. What amount of gain or loss does Oriole recognize in the complete liquidation? c. What is Oriole's tax basis in the building and land after the complete liquidation?

Battle Corporation redeems 20 percent of its stock for $100,000 in a stock redemption that is treated as an exchange by the shareholders. Battle's E&P at the date of the redemption is $200,000. Battle will reduce its earnings and profits by $100,000 as a result of the redemption.

Only income and deductions included on a corporation's income tax return are included in the computation of current earnings and profits.

General Inertia Corporation made a pro rata distribution of $50,000 to Tiara, Inc. in partial liquidation of the company on December 31, year 1. Tiara, Inc. owns 500 shares (50%) of General Inertia. The distribution was in exchange for 250 shares of Tiara's stock in the company. After the partial liquidation, Tiara continued to own 50% of the remaining stock in General Inertia. At the time of the distribution, the shares had a fair market value of $200 per share. Tiara's income tax basis in the shares was $100 per share. General Inertia had total E&P of $800,000 at the time of the distribution. What amount of dividend or capital gain does Tiara recognize as a result of the transaction?

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

Sam owns 70 percent of the stock of Club Corporation. Unrelated individuals own the remaining 30 percent. For a stock redemption of Sam's stock to be treated as an exchange under the "substantially disproportionate" test, what percentage of Club stock must Sam own after the redemption?

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:

Which of these items is not an adjustment to taxable income to compute current E&P?

Red Blossom Corporation transferred its 40 percent interest to Tea Company as part of a complete liquidation of the company. In the exchange Red Blossom received land with a fair market value of $500,000. The corporation's basis in the Tea Company stock was $300,000. The land had a basis to Tea Company of $600,000. What amount of gain does Red Blossom recognize in the exchange and what is its basis in the land it receives?

Which of the following factors would not be considered in determining if compensation paid to a shareholder/employee is reasonable?

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