CHAPTER 19 CORPORATIONS: DISTRIBUTIONS NOT IN COMPLETE LIQUIDATION

1. Which of the following is an incorrectstatement regarding the application of the § 318 stock attribution rules?

a. An individual is not deemed to own the shares owned by his or her siblings.

b. Stock owned by an estate is deemed to be owned in full by a beneficiary.

c. Stock owned by any shareholder owning 50% or more of a corporation’s stock is deemed to be owned in full by the corporation.

d. Stock owned by a partnership is deemed to be owned proportionately by a partner.

e. None of the above.

2. Bristlebird Corporation (E & P of $700,000) has 3,000 shares of common stock outstanding. Juan owns 1,500 shares and his wife, Roberta, owns 1,500 shares. Juan and Roberta each have a basis of $90,000 in their Bristlebird stock. In the current year, Bristlebird Corporation redeems 1,000 shares from Juan for $250,000. With respect to the distribution in redemption of the Bristlebird stock:

a. Juan has dividend income of $250,000.

b. Juan has dividend income of $190,000.

c. Juan has a capital gain of $250,000.

d. Juan has a capital gain of $190,000.

e. None of the above.

3. Hazel, Emily, and Frank, unrelated individuals, own all of the stock in Wren Corporation (E & P of $1.2 million) as follows: Hazel, 1,500 shares; Emily, 300 shares; and Frank, 200 shares. Wren redeems 900 of Hazel’s shares (basis of $210,000) for $625,000. With respect to the distribution in redemption of the stock:

a. Hazel has a capital gain of $415,000.

b. Hazel has a capital gain of $625,000.

c. Hazel has dividend income of $415,000.

d. Hazel has dividend income of $625,000.

e. None of the above.

4. Hannah, Greta, and Winston own the stock in Redpoll Corporation (E & P of $900,000) as follows: Hannah, 600 shares; Greta, 400 shares; and Winston, 1,000 shares. Greta is Hannah’s daughter, and Winston is Hannah’s brother. Redpoll Corporation redeems 400 of Hannah’s shares (basis of $55,000) for $240,000. Hannah purchased the stock three years ago as an investment. With respect to the stock redemption, Hannah has:

a. Long-term capital gain of $185,000.

b. Long-term capital gain of $240,000.

c. Dividend income of $185,000.

d. Dividend income of $240,000.

e. None of the above.

5. Lucinda owns 1,100 shares of Blackbird Corporation stock at a time when Blackbird has 2,000 shares of stock outstanding. The remaining shareholders are unrelated to Lucinda. What is the minimum number of shares Blackbird must redeem from Lucinda so that the transaction will qualify as a disproportionate redemption?

a. 220.

b. 393.

c. 484.

d. 880.

e. None of the above.

6. Ethel, Hannah, and Samuel, unrelated individuals, own the stock in Broadbill Corporation (E & P of $700,000) as follows: Ethel, 300 shares; Hannah, 300 shares; and Samuel, 400 shares. Broadbill redeems 200 of Samuel’s shares (basis of $175,000) for $250,000. If Samuel’s stock is a capital asset and has been held for over three years, Samuel has:

a. A long-term capital gain of $75,000.

b. A short-term capital gain of $75,000.

c. Ordinary income of $250,000.

d. Ordinary income of $75,000.

e. None of the above.

7. Julian, Berta, and Maria own 400 shares, 400 shares, and 200 shares, respectively, in Caramel Corporation (E & P of $750,000). Berta is Julian’s sister, and Maria is Julian’s aunt. Caramel Corporation redeems all of Julian’s stock for $420,000. Julian paid $200 a share for the stock five years ago. Julian continued to serve on Caramel’s board of directors after the redemption. With respect to the redemption:

a. Dividend income of $340,000.

b. Dividend income of $420,000.

c. Long-term capital gain of $340,000.

d. Long-term capital gain of $420,000.

e. None of the above.

ANSWER: c

8. Lupe and Rodrigo, father and son, each own 50% of the stock outstanding of Heron Corporation (E & P of $400,000). During the current year, Heron redeems all of Lupe’s shares for $250,000. The transaction cannot qualify as a complete termination redemption if:

a. Lupe received a $250,000 note receivable from Heron in the stock redemption.

b. Lupe loaned Heron Corporation $50,000 two years following the redemption.

c. Rodrigo continued to serve on Heron Corporation’s board of directors for two years following the redemption.

d. Three years after the redemption, Lupe inherited Rodrigo’s shares in Heron as a result of his son’s death.

e. None of the above.

9. The gross estate of John, decedent, includes stock in Crimson Corporation and Jade Corporation valued at $1.3 million and $2 million, respectively. John’s adjusted gross estate is $9 million. He owned 23% of the Crimson stock and 31% of the Jade stock. Immediate members of John’s family own the remaining shares of both Crimson and Jade. Those individuals are also the sole beneficiaries of John’s estate. Death taxes and funeral and administration expenses for John’s estate are $1.3 million. John had a basis of $475,000 in the Crimson stock and $510,000 in the Jade stock. Crimson Corporation (E & P of $3 million) distributed land worth $1.3 million (basis of $800,000) to John’s estate in redemption of all of the Crimson stock. Which of the following is a correctstatement regarding the tax consequences of this redemption?

a. The estate recognizes dividend income of $1.3 million on the redemption.

b. Crimson Corporation recognizes no gain on the distribution of the land.

c. The estate recognizes no gain or loss on the redemption.

d. The estate has a basis of $800,000 in the land.

e. None of the above.