Question 1

A stock redemption is always treated as if the shareholder sold his stock to the corporation.

Accepted Answer

A) True 
 B)False

Question 2

Joshua owns 100% of Steeler Corporation's stock. Joshua's basis in the stock is $8,000. Steeler Corporation has E&P of $40,000. If Steeler Corporation redeems 60% of Joshua's stock for $50,000, Joshua must report dividend income of

Accepted Answer

A) $0. 
B) $8,000. 
C) $40,000. 
D) $50,000.

Question 3

Identify which of the following statements is true.

Accepted Answer

A) Only stock included in the decedent's gross estate can be redeemed under the Sec. 303 provisions. 
B) If the stock redemption proceeds are used to pay either the estate's funeral and administrative expenses or death taxes, the redemption can qualify for capital gains treatment under Sec. 303. 
C) Usually, a stock redemption qualifying under Sec. 303 as a redemption to pay death taxes will result in little or no gain to the redeeming shareholder. 
D) All of the above are true.

Question 4

Payment Corporation has accumulated E&P of $19,000 and current E&P of $28,000. During the year, the corporation makes the following distributions to its sole shareholder:  The sole shareholder's basis in her stock is $45,000. What are the tax consequences of the June 1 distribution?

Accepted Answer

The answer of Payment Corporation has accumulated E&P of $19,000...

Question 5

White Corporation is a calendar-year taxpayer. Wilhelmina owns all of its stock. Her basis for the stock is $25,000. On March 1 of the current year (not a leap year), White Corporation distributes $60,000 to Wilhelmina. Determine the tax consequences of the cash distribution to Wilhelmina in each of the following independent situations:
a)Current E&P $15,000, accumulated E&P $50,000.
b)Current E&P $25,000, accumulated E&P $(25,000).
c)Current E&P ($36,500), accumulated E&P $65,000.
d)Current E&P ($10,000), accumulated E&P $(25,000).

Accepted Answer

The answer of White Corporation is a calendar-year taxpayer. Wilhelmina...

Question 6

Strong Corporation is owned by a group of 20 shareholders. During the current year, Strong Corporation pays $225,000 in salary and bonuses to Stedman, its president and controlling shareholder. The IRS audits Strong's tax return and determines that reasonable compensation for Stedman would be $125,000. Strong Corporation agrees to the adjustment.
a)What effect does the disallowance of part of the deduction for Stedman's salary and bonuses have on Strong Corporation and Stedman?
b)What tax savings could have been obtained by Strong Corporation and Stedman if an agreement had been in effect that required Stedman to repay Strong Corporation any amounts determined by the IRS to be unreasonable?

Accepted Answer

The answer of Strong Corporation is owned by a group...

Question 7

Peter owns all 100 shares of Parker Corporation's stock. His basis in the stock is $30,000. Parker Corporation has $300,000 of E&P. Parker Corporation redeems 25 of Peter's shares for $90,000. What are the consequences to Peter and to Parker Corporation?

Accepted Answer

The answer of Peter owns all 100 shares of Parker...

Question 8

Van owns all 1,000 shares of Valley Metal Corporation stock. The stock has a $100,000 FMV. Karen wants to purchase the stock from Van but has only $70,000. Valley Metal has ample cash, which is not needed for operations. Which of the following best qualifies for bootstrap redemption treatment and no constructive dividends to the purchaser?

Accepted Answer

A) Karen contracts to acquire all the stock of the corporation on an installment plan and then uses corporate funds to pay the installment obligations. 
B) Karen buys 70 shares from Van for $70,000 and Van causes Valley Metal Corporation to redeem his remaining shares for $30,000. 
C) Karen buys 70 shares from Van for $70,000 and then contracts to buy the remaining 30 shares from Van. She then causes Valley Metal Corporation to redeem Van's 30 shares. 
D) Karen buys 70 shares from Van for $70,000 and obtains an option to purchase Van's remaining stock for $50,000. Karen then assigns the option to Valley Metal Corporation. The corporation subsequently exercises the option.

Question 9

On April 1, Delta Corporation distributes $120,000 in cash to each of its two equal shareholders, Sarah and Matt. At the time of the distribution, Delta's E&P is $160,000. Sarah's basis in her stock is $50,000 and Matt's basis in his stock is $20,000. How are the distributions characterized to Sarah and Matt? Be specific.

Accepted Answer

The answer of On April 1, Delta Corporation distributes $120,000...

Question 10

The Sec. 318 family attribution rules can be waived for purposes of the Sec. 302(b)(3)complete termination rules even though the redeeming shareholder is a creditor of the corporation.

Accepted Answer

A) True 
 B)False

Question 11

Jerry purchased land from Winter Harbor Corporation, his 100%-owned corporation, for $275,000. The corporation purchased the land three years ago for $300,000. Similar tracts of land located nearby have sold for $400,000 in recent months. What tax issues should be considered with respect to the corporation's sale of the land?

Accepted Answer

The answer of Jerry purchased land from Winter Harbor Corporation,...

Question 12

Corporate distributions that exceed earnings and profits are always capital gains.

Accepted Answer

A) True 
 B)False

Question 13

In the current year, Ho Corporation sells land that has a $6,000 basis and a $10,000 FMV to Henry, an unrelated individual. Henry makes a $2,500 down payment this year and will pay Ho $2,500 per year for the next three years, plus interest on the unpaid balance at a rate acceptable to the IRS. Ho's realized gain is $4,000. Since Ho is not in the business of selling land, it will use the installment method of accounting. How does this transaction affect Ho's E&P in the current year and the three subsequent years?

Accepted Answer

The answer of In the current year, Ho Corporation sells...

Question 14

Which of the following requirements must be met for a redemption to be treated as substantially disproportionate?

Accepted Answer

A) The shareholder must own less than 50% of the outstanding stock (in terms of voting power)after the redemption. 
B) After the redemption, the shareholder must own less than 80% of his percentage ownership of voting stock prior to the redemption. 
C) After the redemption, the shareholder must own less than 80% of his percentage ownership of common stock (voting and nonvoting)prior to the redemption. 
D) All of the above must be met.

Question 15

What is a stock redemption? What are some of the reasons for making a stock redemption? Why are some redemptions treated as sales and others as dividends?

Accepted Answer

The answer of What is a stock redemption? What are...

Question 16

Identify which of the following statements is false.

Accepted Answer

A) A stock redemption is treated as a sale or exchange only if the shareholder's ownership of one particular class of stock is terminated. 
B) An individual is not considered to own stock owned by a brother under the family attribution rules of Sec. 318. 
C) An individual is considered to own the stock owned by his parents, children, spouse, and grandchildren under the family attribution rules of Sec. 318. 
D) A person who has an option to purchase stock is considered to own the stock.

Question 17

Which of the following is not a condition that permits a stock redemption to be treated as a sale?

Accepted Answer

A) It provides funds for payment of income taxes. 
B) It is not essentially equivalent to a dividend. 
C) The redemption is substantially disproportionate. 
D) The redemption completely terminates the shareholder's interest.

Question 18

Tia owns 2,000 shares of Bass Corporation common stock with an $80,000 basis. Bass distributes a nontaxable preferred stock dividend. When the preferred stock is distributed, it has an FMV of $60,000 and the FMV of the 2,000 common stock shares is $180,000. The basis of the preferred stock is

Accepted Answer

A) $0. 
B) $20,000. 
C) $60,000. 
D) $80,000.

Question 19

Identify which of the following statements is true.

Accepted Answer

A) The distribution of preferred stock as a stock dividend will result in income or a taxable gain being recognized by the shareholder on the date of the distribution if the stock is Sec. 306 stock. 
B) Corporations without E&P can distribute preferred stock as a stock dividend that is Sec. 306 stock. 
C) Two corporations are considered to be brother-sister corporations for purposes of the Sec. 304 redemption rules if one shareholder owns more than 50% of each corporation. 
D) All of the above are false.

Question 20

Dixie Corporation distributes $31,000 to its sole shareholder, Sally. At the time of the distribution, Dixie's E&P is $25,000 and Sally's basis in her Dixie stock is $10,000. Sally's basis in her Dixie stock after the distribution is

Accepted Answer

A) $4,000. 
B) $10,000. 
C) $25,000. 
D) $31,000.

Exam 4: Corporate Nonliquidating Distributions

A stock redemption is always treated as if the shareholder sold his stock to the corporation.

Joshua owns 100% of Steeler Corporation's stock. Joshua's basis in the stock is $8,000. Steeler Corporation has E&P of $40,000. If Steeler Corporation redeems 60% of Joshua's stock for $50,000, Joshua must report dividend income of

Identify which of the following statements is true.

Payment Corporation has accumulated E&P of $19,000 and current E&P of $28,000. During the year, the corporation makes the following distributions to its sole shareholder: The sole shareholder's basis in her stock is $45,000. What are the tax consequences of the June 1 distribution?

Peter owns all 100 shares of Parker Corporation's stock. His basis in the stock is $30,000. Parker Corporation has $300,000 of E&P. Parker Corporation redeems 25 of Peter's shares for $90,000. What are the consequences to Peter and to Parker Corporation?

The Sec. 318 family attribution rules can be waived for purposes of the Sec. 302(b)(3)complete termination rules even though the redeeming shareholder is a creditor of the corporation.

Corporate distributions that exceed earnings and profits are always capital gains.

Which of the following requirements must be met for a redemption to be treated as substantially disproportionate?

What is a stock redemption? What are some of the reasons for making a stock redemption? Why are some redemptions treated as sales and others as dividends?

Identify which of the following statements is false.

Which of the following is not a condition that permits a stock redemption to be treated as a sale?

Tia owns 2,000 shares of Bass Corporation common stock with an $80,000 basis. Bass distributes a nontaxable preferred stock dividend. When the preferred stock is distributed, it has an FMV of $60,000 and the FMV of the 2,000 common stock shares is $180,000. The basis of the preferred stock is

Identify which of the following statements is true.

Dixie Corporation distributes $31,000 to its sole shareholder, Sally. At the time of the distribution, Dixie's E&P is $25,000 and Sally's basis in her Dixie stock is $10,000. Sally's basis in her Dixie stock after the distribution is