South-Western Federal Taxation 2015 Corporations Partnerships Estates and Trusts 38th Edition Hoffman Solutions Manual 1

South-Western Federal Taxation 2015
Corporations Partnerships Estates and

Trusts 38th Edition Hoffman Solutions
Manual
Full download at link:
Solution Manual: https://testbankpack.com/p/solution-manual-for-south-

western-federal-taxation-2015-corporations-partnerships-estates-and-trusts-
38th-edition-hoffman-raabe-maloney-young-smith-1285438299-
9781285438290/
Test Bank: https://testbankpack.com/p/test-bank-for-south-western-federal-

taxation-2015-corporations-partnerships-estates-and-trusts-38th-edition-
hoffman-raabe-maloney-young-smith-1285438299-9781285438290/
CHAPTER 6
CORPORATIONS: REDEMPTIONS AND LIQUIDATIONS
SOLUTIONS TO PROBLEM MATERIALS
Status: Q/P
Question/ Learning Present in Prior
Problem Objective Topic Edition Edition
1 LO 1 Why sale or exchange treatment limited to Unchanged 1

qualifying stock redemptions
2 LO 1 Stock redemption defined Unchanged 2
3 LO 1, 2, 6 Stock redemption or sale to third party Unchanged 3
4 LO 1 Sale or exchange versus dividend treatment Unchanged 4
on redemption
5 LO 1 Corporate shareholder preference for Unchanged 5
nonqualified stock redemption treatment
6 LO 1 Loss recognition in a qualifying stock Unchanged 6
redemption
6-1
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6-2 2015 Corporations Volume/Solutions Manual
Status: Q/P
7 LO 1 Basis of property received in stock Unchanged 7

redemption
8 LO 1 Stock redemptions: effect of state law Unchanged 8
9 LO 1 Stock attribution rules: partnerships Unchanged 9
10 LO 1 Stock attribution rules: when not applicable Unchanged 10
11 LO 1 Not essentially equivalent redemption: Unchanged 11
requirements
12 LO 1 Nonqualified stock redemption: basis of Unchanged 12
shares redeemed
13 LO 1 Disproportionate redemption: requirements Unchanged 13
14 LO 1, 2 Complete termination redemption Unchanged 14
15 LO 1, 6 Complete termination redemption: Unchanged 15
requirements for family attribution waiver
16 LO 1 Partial liquidation: not essentially equivalent Unchanged 16
to a dividend
17 LO 1, 2 Partial liquidation Unchanged 17
18 LO 1, 2 Redemption to pay death taxes: requirements Unchanged 18
for and consequences of
19 LO 1, 2 Redemption to pay death taxes Unchanged 19
20 LO 2, 6 Gain/loss recognition to corporation on Unchanged 20
redemption distribution
Corporations: Redemptions and Liquidations 6-3
Status: Q/P
21 LO 1, 2, 6 Tax consequences of redemption to Unchanged 21

distributing corporation: divorce
22 LO 2 Tax consequences of redemption to Unchanged 22
distributing corporation: E & P
23 LO 3 Preferred stock bailout: consequences of sale Unchanged 23
24 LO 3 Redemption through use of related corporation: Unchanged 24
requirements
25 LO 4 Corporate liquidation: reasons for Unchanged 25
26 LO 4 Corporate liquidation: loss limitations Unchanged 26
27 LO 4 Corporate liquidation : defined Unchanged 27
28 LO 4 Related-party loss limitation: disqualified Unchanged 28
property defined
29 LO 4 Built-in loss limitation: tax avoidance purpose Unchanged 29
30 LO 4 Tax consequences to shareholder in complete Unchanged 30
liquidation: use of installment method to
report gain
31 LO 5 Section 332 liquidation: consequences to Unchanged 31
parent
32 LO 5 Section 332 liquidation: requirements Unchanged 32
33 LO 5 Section 332 liquidation: tax consequences to Unchanged 33
subsidiary and minority shareholder
34 LO 5 Section 332 liquidation: transfer in Unchanged 34
satisfaction of indebtedness
35 LO 5, 6 Section 338: when beneficial and detrimental Unchanged 35
to parent
36 LO 5 Section 338: consequences of election Unchanged 36
37 LO 5 Section 338: subsidiary liquidation compared Unchanged 37
with no election from parent’s perspective
38 LO 1, 2, 6 Comparison of dividend distribution with Unchanged 38
qualifying redemption: individual versus
corporate shareholder
39 LO 1 Comparison of tax treatment of dividend Unchanged 39
distribution and qualifying stock
redemption to individual shareholder
redemption to corporate shareholder
redemption to individual shareholder with
capital loss carryover
redemption to corporate shareholder with
capital loss carryover
Status: Q/P
43 LO 1 Stock attribution rules Unchanged 43

44 LO 1 Not essentially equivalent redemption and Unchanged 44
disproportionate redemption
45 LO 1, 2 Disproportionate redemption: minimum Unchanged 45
shares to qualify; tax consequences to
shareholder and corporation
46 LO 1 Complete termination redemption: Unchanged 46
applicability of family attribution waiver
47 LO 1, 2 Sale of stock versus complete termination Unchanged 47
redemption: effect on retiring shareholder,
remaining shareholder, and corporation
48 LO 1, 2 Partial liquidation: tax consequences to Unchanged 48
individual and corporate shareholders
49 LO 1 Redemption to pay death taxes Unchanged 49
50 LO 1 Redemption to pay death taxes: stock of two Unchanged 50
corporations
51 LO 1, 2 Disproportionate redemption: consequences Unchanged 51
to shareholder and effect on E & P
52 LO 2 Effect of redemption on corporation: E & P Unchanged 52
adjustment and treatment of redemption
expenses
53 LO 3 Section 306 stock: sale and redemption Unchanged 53
54 LO 3 Redemption through use of related Unchanged 54
corporations
55 LO 1, 2, 4 Liquidations and redemptions compared: Unchanged 55
recognition of loss by corporation and
shareholder
56 LO 4 Complete liquidation: distribution of property Unchanged 56
subject to liability
57 LO 4 Related-party loss limitation: not pro rata Unchanged 57
distribution of property, tax consequences
to corporation and shareholder
58 LO 4 Built-in loss limitation: no tax avoidance Unchanged 58
purpose
59 LO 4 Built-in loss limitation: distribution and tax Unchanged 59
avoidance purpose with basis step-down
60 LO 4 Complete liquidation: related-party loss Unchanged 60
limitation
61 LO 4 Complete liquidation: disqualified property Unchanged 61
and built-in loss property
Status: Q/P
62 LO 4 Complete liquidation: tax consequences to Unchanged 62

corporation and shareholder when
property distributed with liability
63 LO 4 Complete liquidation: tax consequences to Unchanged 63
shareholder when installment notes
distributed
64 LO 4, 5 Liquidation of subsidiary: distribution of loss Unchanged 64
property to minority shareholder
65 LO 4, 5 Liquidation of subsidiary: gain and loss Unchanged 65
properties, minority shareholder
66 LO 5 Liquidation of subsidiary: indebtedness of Unchanged 66
subsidiary to parent
67 LO 5 Section 338: election requirements Unchanged 67
68 LO 5 Section 338: tax consequences to parent and Unchanged 68
subsidiary
Status: Q/P
Research Present in Prior
Problem Topic Edition Edition
1 Effect of filing a late family attribution waiver Unchanged 1

agreement
2 Charitable contribution of § 306 stock Unchanged 2
3 Complete termination redemption: waiver of family New
attribution
4 Constructive liquidation Unchanged 4
5 Internet activity Unchanged 5
6 Internet activity Unchanged 6
Proposed solutions to the Research Problems are found in the Instructor's Guide.
CHECK FIGURES
38.a. Teal taxable gain of $250,000; Grace 52. E & P reduced by $300,000; $13,000
dividend income of $400,000. redemption expenses not deductible;
38.b. Teal taxable gain of $250,000; Grace $18,500 interest deductible.
$400,000 of dividend, subject to the 53.a. No tax consequences other than
dividends received deduction. allocation of stock basis.
38.c. Teal taxable gain of $250,000; Grace 53.b. Ordinary income of $75,000; $20,000
capital gain of $310,000. basis to common stock.
38.d. Teal taxable gain of $250,000; Grace 53.c. Dividend income of $75,000; $20,000
capital gain of $310,000. basis to common stock; E & P reduced
38.e. Teal no preference; Grace prefers option $75,000.
b., if corporation; option c., if individual. 54. Martin dividend income of $300,000.
39.a. $15,000. 55.a. Dove $40,000 loss not recognized; Julia
39.b. $22,500. $15,000 loss not recognized and basis in
40.a. $34,000. land of $260,000.
40.b. $10,200. 55.b. Dove $40,000 loss not recognized; Julia
41.a. $50,000. $15,000 loss recognized and basis in land
41.b. $3,000. of $260,000.
41.c. Choose qualifying stock redemption. 56.a. $270,000 LTCG.
42.a. $50,000. 56.b. $240,000 LTCG.
42.b. $0. 57. Mulberry $75,000 loss not recognized;
43.a. 1,350 shares. Anar $50,000 gain recognized and basis
43.b. 1,000 shares. in land of $575,000.
43.c. 1,400 shares. 58. $290,000.
44.a. $225,000 dividend income. 59. $175,000.
44.b. $270,000 LTCG. 60. Pink should either distribute the land to
45. 231 minimum shares; Lana $184,800 Paul or sell it and distribute the cash.
LTCG; Stork $196,350 reduction in 61. Pink should either distribute the land to
E & P. Paul or sell it and distribute the cash.
46.a. No. 62. Scarlet LTCL of $35,000; Jake LTCG of
46.b. Yes. $80,000 and basis in land of $390,000.
46.c. Yes. 63. Recognize $90,000 gain in the year of
46.d. No. liquidation, and $72,000 gain with each
47.a. Lori dividend income of $600,000; note collection.
Swan reduces E & P by $600,000; 64. Magenta no gain recognized on
Robert capital gain of $515,000. distribution to Fuchsia, $25,000 loss not
47.b. Robert capital gain of $515,000; recognized on distribution to Marta;
Swan reduces E & P by $500,000. Fuchsia no gain or loss recognized and
48.a. Sultan recognized gain of $300,000; basis of $620,000; Marta $20,000 gain
Turquoise dividend income of $350,000; recognized and basis of $50,000.
Lime recognizes gain of $200,000. 65.a. Ivory no gain or loss recognized;
48.b. Dividend income of $350,000 to Sultan Gold no gain or loss recognized and
and Turquoise; Lime recognizes gain of $80,000 basis in inventory; Imelda
$275,000. $25,000 gain recognized and $200,000
49. No gain or loss on $1 million of basis in equipment.
distribution (§ 303). Dividend income on 65.b. Ivory $120,000 gain recognized; Gold no
$1.5 million of distribution. gain or loss recognized and $350,000
50. No gain. basis in equipment; Imelda $25,000
51.a. Tammy dividend income of $75,000; recognized gain and $200,000 basis in
Broadbill E & P reduced by $75,000. inventory.
51.b. Tammy LTCG of $67,500; Broadbill
E & P reduced by $75,000.
66. Green recognizes no gain; Orange 68.a. Amazon recognized gain of $600,000;
recognizes $50,000 gain. tax of $204,000; new basis in assets of

67. Qualified stock purchase May 2, 2014; $1.4 million. Auk no tax consequences.
file election by February 15, 2015. 68.b. Amazon no gain or loss recognized. Auk
no gain or loss recognized; basis in assets
of $1.4 million.
DISCUSSION QUESTIONS
1. In a sale of stock to a third party, the shareholder’s ownership interest in the corporation is diminished,
and such dispositions result in sale or exchange treatment. In a stock redemption, however, a
shareholder’s ownership interest in the corporation may be unaffected as a result of the redemption.
This is particularly true where the stock of the corporation is solely owned or owned entirely or
predominately by related parties. It is this possibility of little or no diminishment in ownership interest
in a stock redemption that gave rise to the qualifying stock redemption rules. In those cases where a
shareholder’s ownership is sufficiently diminished as a result of a stock redemption, sale or exchange
treatment is the result. However, if a shareholder’s ownership is relatively unaffected as a result of a
stock redemption, the transaction has the same effect as a dividend distribution and is taxed as such.
2. Under § 317(b), a stock redemption occurs when a “corporation acquires its stock from a shareholder
in exchange for property, whether or not the stock so acquired is cancelled, retired, or held as treasury
stock.”
3. • Whether Louis or Mari have a preference for personally acquiring the Cerise stock or for a stock
redemption or for a sale to a third party.
• Whether Louis or Mari have the financial resources to acquire the Cerise stock.
• If Louis or Mari do acquire the Cerise stock, their basis in the shares.
• Whether Cerise Corporation has the financial resources, including the ability to issue its own notes,
to fund a stock redemption.
• If Chao has a preference for a cash transaction, whether Cerise has sufficient cash available for
such a distribution or property that can be sold to fund a distribution.
• If Cerise must sell property to finance a redemption, what property should be sold and the tax
consequences resulting from such a sale?
• If property can be distributed in the redemption, whether Cerise has property suitable for a
distribution and the tax consequences from such a distribution.
• If property is distributed pursuant to a redemption, Chao’s basis and holding period for such
property.
• The effect of any property sale and redemption distribution on Cerise’s E & P.
• The tax treatment of any expenditures incurred in a redemption of Chao’s shares, including interest
expense related to a debt-financed redemption.
• Whether there is a market for a sale of the stock to a third party.
4. Brandi’s redemption satisfied the terms of one of the qualifying stock redemptions and was taxed as a
sale or exchange. That is, $23,250 = 15% (LTCG tax rate) × $155,000 LTCG [$200,000 (amount
realized) – $45,000 (basis in stock)]. Yuen’s redemption, however, failed to qualify for sale or exchange
treatment and, instead, the entire distribution was taxed as a dividend: $30,000 = 15% (dividend tax
rate) × $200,000.
5. Corporate shareholders normally prefer dividend income treatment for a redemption (i.e., nonqualified
stock redemption) because the dividends received deduction available to such taxpayers minimizes the
resulting taxable income. Also, corporate taxpayers do not receive preferential tax rate treatment for
dividend and long-term capital gain income.
6. The statement is correct. A qualifying stock redemption is treated as a sale or exchange; thus, the
redemption results in a realized and recognized loss of $20,000 [$80,000 (amount realized) – $100,000
(stock basis)]. Section 267 disallows loss recognition in a qualifying stock redemption if the shareholder
owned (directly or indirectly) more than 50% of the corporation’s stock at the time of the redemption.
7. The statement is correct. A shareholder’s basis in property received in a nonliquidating distribution,

including both qualifying and nonqualified stock redemptions, is equal to the property’s fair market
value on the date of the redemption.
8. No. The tax treatment accorded a stock redemption is determined by the Code, not by state law. A
corporate distribution treated as a sale or exchange under state law may not satisfy any of the qualifying
stock redemption provisions of the Code.
9. Stock owned by a partnership is deemed to be owned proportionately by a partner. Stock owned by a

partner is deemed to be owned in full by the partnership.
10. No. In general, for purposes of the qualifying stock redemption provisions, the stock attribution rules
apply in determining a shareholder’s ownership interest before and after a redemption. However, the
attribution rules do not apply in the case of partial liquidations or redemptions to pay death taxes.
Further, the family attribution rules can be waived in the case of certain complete terminations.
11. A corporate distribution in exchange for stock qualifies as a not essentially equivalent redemption if
there is a “meaningful reduction” in the shareholder’s ownership after the redemption. The “meaningful
reduction test” is applied whether the stock redeemed is common stock or preferred stock. A decrease
in the redeeming shareholder’s voting control appears to be the most significant indicator of a
meaningful reduction, but reductions in the rights of redeeming shareholders to share in corporate
earnings or to receive corporate assets upon liquidation are also considered. If a shareholder continues
to have dominant voting control after a redemption, there probably will not be a “meaningful reduction”
in the shareholder’s ownership in the corporation. The § 318 attribution rules apply in determining
whether there has been a meaningful reduction.
12. The basis of shares redeemed in a nonqualified stock redemption attaches to the shareholder’s
remaining stock basis or, if that shareholder has no remaining direct stock ownership, to stock the
shareholder owns constructively.
13. To qualify as a disproportionate redemption, the shareholder’s ownership interest in the corporation
after the redemption must be:
• less than 80% of the ownership interest before the redemption, and
• less than 50% of the total combined voting power of all classes of stock entitled to vote.
The stock attribution rules apply in determining the shareholder’s ownership interest before and after
the redemption.
14. • Barry’s basis in the property transferred in the § 351 transaction and the basis in his stock.
• If Barry transferred property in the § 351 transaction with a built-in loss and if so, whether the
election was made to reduce the shareholder’s stock basis in lieu of the basis step-down
applicable to Pheasant.
• Whether the redemption qualifies for sale or exchange treatment.
• Whether Barry is related to any shareholder of Pheasant Corporation.
• If Barry is related to a shareholder of Pheasant, will he continue employment with the

corporation?
• Barry’s basis and holding period in the property received in the redemption.
• Pheasant’s E & P at the time of the distribution.

• Whether Pheasant has a recognized gain or an unrecognized loss as a result of the property
distribution.
• The effect of the distribution on Pheasant’s E & P.
• Whether Pheasant incurred any (nondeductible) redemption expenditures as a result of the

distribution.
15. Unless Lauren satisfies the requirements for the family attribution waiver, she is deemed to own the
shares owned by Brett, or 100% of the Viridian shares outstanding after the redemption. Such a level
of ownership would not satisfy any of the qualifying stock redemption provisions for sale or exchange
treatment. If Lauren satisfies the requirements of the family attribution waiver (e.g., no prohibited
interest held during the 10-year post-redemption period), the redemption would qualify for sale or
exchange treatment as a complete termination redemption. Lauren’s current employment with Viridian
Corporation, as president and chair of the board of directors, would constitute prohibited interests for
purposes of the family attribution waiver. As such, Lauren would have to resign from those positions
as a condition for qualifying the redemption for sale or exchange treatment.
16. In determining whether a distribution is not essentially equivalent to a dividend for the partial
liquidation rules, the test is applied at the corporate level (rather than the shareholder level, as is the
case of a not essentially equivalent redemption). The test requires a genuine contraction of the
corporation’s business and is based on the facts and circumstances of each case. A safe-harbor rule, the
termination of a business test, will satisfy the not essentially equivalent to a dividend requirement. To
qualify for the termination of a business test, the distribution must consist of the assets (or the proceeds
from the sale of the assets) from a trade or business that was actively conducted throughout the five-
year period ending on the date of the distribution. In addition, the corporation must continue to actively
conduct another five-year-old trade or business immediately after the distribution. Finally, neither of
the active businesses must have been acquired in a taxable transaction within that same five-year period.
17. • Whether Brown operated the discontinued business and one other business for the entire five-year
period preceding the distribution.
• Whether Brown would recognize gain or loss on the distribution or sale of the assets. If the assets
are sold, whether any would be sold to related parties.
• Whether Brown would incur any expenses with respect to any sale of assets or distribution to
shareholders.
• Brown’s E & P before and after any distribution.
• Whether there will be a redemption of stock from the shareholders and, if so, whether the
redemption would be pro rata with respect to the shareholders.
• The shareholders’ basis in their Brown stock before and after any distribution.
• Whether any of the shareholders are corporate taxpayers.
• The shareholders’ basis in any assets received in a distribution.
18. A redemption to pay death taxes is applicable to stock of a corporation that is included in the gross estate
of a decedent and whose value exceeds 35% of the value of the adjusted gross estate. In determining the
35% requirement, stock of two or more corporations is treated as the stock of a single corporation if 20%
or more in value of the outstanding stock of each corporation is included in the decedent’s gross estate.
Sale or exchange treatment is available under § 303 to the extent of the sum of the estate’s death taxes and
funeral and administration expenses.
A redemption to pay death taxes is treated as a sale or exchange of the stock for the estate (shareholder).
Because the estate’s basis in the redeemed stock is stepped up (or down) to fair market value at death
(or alternate valuation date, if elected), there is generally no gain (or loss) recognized by the estate in a
§ 303 redemption. If property is received in the redemption, the estate’s basis in the property is its fair
market value on the date of the redemption. The property’s holding period begins on the date of the
redemption.
The distributing corporation recognizes gain (but not loss) on any distribution of property pursuant to
a redemption to pay death taxes. The corporation’s E & P is reduced by an amount not in excess of the
ratable share of the E & P attributable to the stock redeemed. No deduction is allowed for any
expenditures incurred in connection with the redemption, with the exception of interest expense related
to the redemption that is otherwise deductible.
19. • Valuation of Angie’s estate.
• Whether the executor should elect the alternate valuation date.
• Whether Angie’s lifetime gifts to Ann included stock in Bluebird Corporation and, if so, the facts
surrounding that transfer (e.g., dates, motivation).
• Whether a redemption of the estate’s shares in Redbird Corporation will qualify under § 303.
• Whether a redemption of the estate’s shares in Bluebird will qualify under § 303 (redemption to
pay death taxes) or § 302 (complete termination redemption).
• If a redemption of Bluebird stock is advantageous, whether noncash property should be distributed

in the redemption and, if so, which property.
• Whether Ann should purchase the estate’s shares in Bluebird.
• Effect of Angie’s lifetime gifts for her estate as to the unified tax credit.
• Marital and other estate deductions.
• Due date of estate tax return.
• Income tax return for estate.
20. Corporate distributions in redemption of stock are governed under § 311. Under that provision, gains,
but not losses, are recognized on the distribution of noncash property when the property’s fair market
value differs from its basis. As such, the distribution of Property A would result in a $75,000 recognized
gain [$150,000 (fair market value) – $75,000 (basis)] to Indigo. The distribution of Property B would
result in a $45,000 disallowed loss [$150,000 (fair market value) – $195,000 (basis)]. Indigo could
distribute the cash, as neither gain nor loss is recognized by Indigo on a cash distribution. However, a
sale of Property B to recognize the $45,000 loss and a distribution of the sales proceeds to Linda
produces more favorable results. (To avoid the loss disallowance rules of § 267, the sale must not be to
a related party.)
21. • Whether Pink Corporation should distribute a cash dividend to Donna to enable her to buy Steven’s
stock and, if so, the tax consequences to Donna.
• Whether Pink Corporation should redeem Steven’s stock and, if so, the tax consequences to Steven.
• Effect of any dividend or redemption distribution on Pink Corporation’s E & P.
• Deductibility of any expenditures incurred by Pink Corporation in connection with a stock

redemption.
• Whether Donna and Steven live in a community property state.
• How to sell the residence and utilize the exclusion provision of § 121.
• Tax consequences of alimony, child support, and the property settlement.
• Dependency deductions for the children.
• Deductibility of legal costs associated with the divorce.
• Donna’s and Steven’s filing statuses.
22. In a qualifying stock redemption, the corporation’s E & P is reduced by the lesser of the amount of the
distribution or the amount equal to the ratable share of the corporation’s E & P attributable to the stock
redeemed. In a nonqualified stock redemption, the corporation’s E & P is reduced by the amount of the
dividend distribution.
23. In a sale of § 306 stock to an unrelated party, the shareholder generally recognizes ordinary income to
the extent of the stock’s fair market value on the date of the stock dividend. The preferential tax rate
for dividends applies to this ordinary income. If the amount realized in the sale exceeds the ordinary
income taint, the excess is applied against the basis of the preferred stock. No loss is recognized on a
sale of § 306 stock; instead, any unrecovered basis in the preferred stock attaches to the basis of the
shareholder’s common stock. A sale of § 306 stock has no effect on the issuing corporation’s E & P.
24. Section 304 applies to sales of stock of one corporation to a related corporation. The corporations are
related corporations if a shareholder owns, directly and indirectly, at least 50% of the stock (voting or
value) of such corporations.
25. Shareholders might decide to liquidate a corporation for a number of reasons, including one or more of
the following:
• The corporate business has been unsuccessful.
• The shareholders wish to acquire the corporation’s assets.
• A third party wishes to acquire the corporation’s assets. A sale of the assets to the third party could
be followed by the distribution of the sales proceeds to the shareholders in liquidation of the
corporation. Alternatively, the third party could purchase the shareholders’ stock and then liquidate
the corporation to acquire the assets.
26. Corporate losses are disallowed in complete liquidations in four situations. First, a loss is disallowed
on the distribution of property to a related person if such distribution either is not pro rata or it consists
of disqualified property. Second, a loss is disallowed on the sale, exchange, or distribution of property
that was contributed to the corporation (in a § 351 or contribution to capital transaction) with a built-in
loss (fair market value less than basis, after application of the basis step-down rules) shortly before the
adoption of a plan of liquidation. This disallowance applies when the corporation’s acquisition of the
property was part of a plan whose principal purpose was to recognize a loss on that property by the
liquidating corporation. The last two disallowance rules apply in the case of a liquidation of a subsidiary
corporation. In liquidation, a subsidiary corporation does not recognize losses on the distribution of
property to its parent shareholder. Similarly, losses on the distribution of property to the minority
shareholders of a liquidating subsidiary also are not recognized.
27. For tax purposes, a liquidation exists when a corporation ceases to be a going concern. The corporation
continues solely to wind up affairs, pay debts, and distribute any remaining assets to its shareholders.
Retention of a nominal amount of assets to pay remaining debts and preserve legal status will not defeat
liquidation status. Legal dissolution under state law is not required for a liquidation to be complete for
tax purposes.
28. Disqualified property is property that is acquired by the corporation in a § 351 or contribution to capital
transaction during the 5-year period ending on the date of the liquidating distribution.
29. A tax avoidance purpose is presumed if the property was acquired by the corporation within two years
of the adoption of a plan of liquidation. This presumptive rule can be rebutted if there was a clear and
substantial relationship between the property and the corporation’s business(es). The built-in loss rule
will apply only in very limited cases where the corporation acquired the property in question more than
two years prior to the adoption of the plan of liquidation.
30. The general rule under § 331 provides for sale or exchange treatment to the shareholder. The
shareholder is treated as having sold his or her stock to the corporation being liquidated. Thus, the
difference between the fair market value of the assets received from the corporation and the adjusted
basis of the stock surrendered is the gain or loss recognized. Typically, the stock is a capital asset in the
hands of the shareholder and capital gain or loss results. The basis of property received in a liquidation
is the property’s fair market value on the date of the distribution.
A shareholder’s gain on the receipt of installment notes obtained by a liquidating corporation on the sale of
its assets may be deferred to the point of collection under § 453(h). The shareholder must allocate his or her
stock basis among the notes and any other assets received from the corporation. With respect to the notes
received, the shareholder may defer gain until the notes are collected. (Under § 453(d), the shareholder can
elect out of the installment method.) The interest element on the notes is accounted for separately.
31. A parent corporation recognizes no gain or loss in a § 332 liquidation of a subsidiary. The parent takes
a basis in the property received equal to the subsidiary’s basis in such property. In addition, the parent’s
holding period in the property includes that of the subsidiary. Other tax attributes of the subsidiary (e.g.,
net operating loss carryover, E & P) also carry over to the parent corporation. The parent’s basis in its
subsidiary stock is eliminated. (If the parent receives property from the subsidiary in satisfaction of
indebtedness, the parent recognizes gain or loss.)
32. a. The parent corporation must own 80% or more of the subsidiary’s voting stock and 80% or
more in value of all its other stock (other than nonvoting preferred) at the time the plan of
liquidation is adopted and until all property is distributed, or the liquidation will not qualify
under § 332.
b. The subsidiary must distribute all its property in complete redemption of all its stock within the
taxable year in which the first distribution is made or within three years from the close of the
tax year in which the first distribution occurred pursuant to the adoption of a plan by the
corporation. Otherwise, the liquidation will not qualify under § 332.
c. The subsidiary must be solvent, or § 332 will not apply. If the subsidiary is insolvent, the parent
corporation will have an ordinary loss deduction for its worthless stock in the subsidiary.
33. A subsidiary corporation recognizes gain (but not loss) on the distribution of property to a minority
shareholder pursuant to a liquidation otherwise governed by § 332. The minority shareholder recognizes
gain or loss equal to the excess of the fair market value of the property received over the shareholder’s
basis in the subsidiary stock. The basis of the property received by the minority shareholder is the
property’s fair market value on the date of the distribution.
34. When § 332 applies, the subsidiary does not recognize gain or loss upon the transfer of property to the
parent. This is the case even if the transfer satisfies a debt. The parent corporation may recognize a gain
or loss on the receipt of property in satisfaction of indebtedness, however, equal to any difference
between the fair market value of the property and the parent’s basis in the indebtedness.
35. Section 338 can produce beneficial results to the parent corporation when the basis in the subsidiary
stock is greater than the subsidiary’s basis in its assets. In such cases, a § 338 election will result in a
step-up in basis for the subsidiary’s assets. If the subsidiary is liquidated, the parent would then acquire
the subsidiary’s assets with the stepped-up basis. Detrimental results might occur from a § 338 election
if the parent’s basis in the subsidiary stock is less than the subsidiary’s basis in its assets. In such cases,
the subsidiary’s assets will receive a step-down in basis. If the subsidiary is liquidated, the parent would
then acquire the subsidiary’s assets with the stepped-down basis.
In a § 338 election, the subsidiary is treated as having sold all of its assets as of the qualified stock
purchase date at their fair market value. In determining the advantages of a § 338 election, consideration
must be given to the gain or loss recognized by the subsidiary in this deemed sale. Loss (e.g., net
operating loss) or tax credit (e.g., business tax credit) carryovers of the subsidiary as of the qualified
stock purchase date can be used to minimize the impact of the deemed asset sale.
36. If a parent makes a § 338 election, the subsidiary is treated as having sold its assets on the qualified
stock purchase date for a value that is determined with reference to the parent’s basis in the subsidiary
stock plus any liabilities of the subsidiary. The deemed sale of assets results in gain or loss recognition
to the subsidiary corporation. The subsidiary is then treated as a new corporation that purchased those
assets on the day following the qualified stock purchase date for a similarly computed value. The
deemed purchase results in a new stepped-up (or -down) basis for the subsidiary’s assets. The new basis
in the subsidiary’s assets carries over to the parent corporation if the subsidiary corporation is
subsequently liquidated.
37. Under the general nonrecognition rules, the parent corporation recognizes no gain or loss on liquidating
distributions from the subsidiary, takes a carryover basis and holding period in the assets received, and
acquires the other tax attributes (e.g., net operating loss carryover, E & P) of the subsidiary (subject to
the carryover rules of § 381). The parent’s basis in the stock of the subsidiary disappears.
The tax consequences to a parent corporation in a subsidiary liquidation that follows a § 338 election
are governed by the same rules as above, but substantive differences will result due to the § 338 election.
The parent corporation still recognizes no gain or loss on liquidating distributions from the subsidiary.
Also, the parent takes a carryover basis and holding period in the assets received. However, these bases
will reflect the stepped-up (or -down) basis resulting from the subsidiary’s deemed asset sale and
repurchase under § 338. Further, the holding period of the assets will begin on the date of the qualified
stock purchase. The parent will acquire the other tax attributes (e.g., net operating loss carryover, E &
P) of the subsidiary, but those attributes are likely to be nominal in amount as the subsidiary is treated
as a new corporation as of the day following the qualified stock purchase date. The parent’s basis in the
stock of the subsidiary disappears.
PROBLEMS
38. a. Teal Corporation would have a taxable gain of $250,000 on the property distribution [$400,000
(fair market value) – $150,000 (basis in property)]. The gain would be ordinary or capital
depending on the type of property distributed. The E & P of Teal Corporation would be
increased by $250,000 (the amount of gain to Teal) and decreased by $400,000 (the FMV of
the property distributed). Teal’s E & P also would be decreased by the amount of tax due on
the gain recognized. Grace would have dividend income of $400,000 and a basis in the property
of $400,000.
b. The tax consequences to Teal Corporation would be the same as in option a. Grace Corporation
would have dividend income of $400,000, but only 30% of the $400,000, or $120,000, would
be taxed to Grace. Because Grace Corporation has a less than 20% ownership interest in Teal
Corporation, the 70% dividends received deduction is applicable. Grace Corporation would
have a basis of $400,000 in the property.
c. The tax consequences to Teal Corporation would be the same as in option a. except that Teal’s
E & P is reduced by the ratable share of its E & P attributable to the stock redeemed (percentage
not provided). Grace would have a capital gain of $310,000 [$400,000 (value of the property)
– $90,000 (basis in stock)] and a basis of $400,000 in the property received.
d. The tax consequences to Teal Corporation would be the same as in option c. Grace Corporation
would have a capital gain of $310,000 [$400,000 (value of the property) – $90,000 (basis in
stock)] and a basis of $400,000 in the property received.
e. Assuming Grace is an individual, she would choose the qualifying stock redemption (option
c.). If the distribution is a qualifying stock redemption, she has a capital gain of $310,000. If
the distribution is a dividend, as in option a., she would have dividend income of $400,000.
Her basis in the property received is the same whether the transaction is a dividend or a
qualifying stock redemption. If Grace is a corporation, it would prefer that the distribution be
a dividend because only 30% of the dividend would be taxed (option b.). Teal Corporation
itself would have no preference because the tax consequences from the transaction are the same
under each option.
39. a. Julio’s income tax liability would be $15,000, computed as follows: $150,000 (amount
realized) – $50,000 (basis in the 1,000 shares redeemed) = $100,000 (long-term capital gain)
× 15% = $15,000.
b. Julio’s income tax liability would be $22,500, computed as follows: $150,000 (dividend) ×
15% = $22,500.
40. a. Tax liability for a corporate shareholder would be $34,000, computed as follows: $150,000
(amount realized) – $50,000 (basis in the stock) = $100,000 (long-term capital gain) × 34% =
$34,000. Corporations do not receive a preferential tax rate on long-term capital gains.
b. Tax liability for a corporate shareholder on a $150,000 dividend from a corporation in which
it has a 25% interest would be $10,200, computed as follows: $150,000 (dividend) – $120,000
[80% (dividends received deduction) × $150,000] = $30,000 × 34% = $10,200. Corporations
do not receive a preferential tax rate on dividend income.
41. a. Julio may deduct the entire $50,000 capital loss carryover to offset $50,000 of the $100,000
long-term capital gain. Thus, Julio would be taxed on only $50,000 of gain. Income tax liability
on the $50,000 long-term capital gain would be $7,500 ($50,000 × 15%).
b. Julio could only deduct $3,000 of the $50,000 capital loss carryover. Julio’s income tax liability
on the $150,000 dividend received would be $22,500 ($150,000 × 15%).
c. The preferred outcome in this situation is that which provides sale or exchange treatment
(option a.). With a qualifying stock redemption, Julio’s income tax liability is $15,000 less
($22,500 – $7,500) than if the redemption is treated as a dividend.
42. a. The corporation could offset the entire $50,000 capital loss carryover against the $100,000
long-term capital gain. Thus, only $50,000 of the gain would be taxed. The tax liability would
be $17,000 ($50,000 × 34%).
b. The corporation could not deduct any of the $50,000 capital loss carryover. Corporations may
only offset capital losses against capital gains. Thus, the corporation would have dividend
income of $150,000 less a dividends received deduction of $120,000 (80% × $150,000). The
remaining $30,000 would be taxed at 34%, for a tax liability of $10,200.
43. a. Howard owns 1,350 shares, 600 shares directly and 750 shares indirectly, in Silver. Howard
constructively owns the stock of his mother (300 shares) and his son (100 shares) and 70% of
the 500 shares, or 350 shares, owned by Maroon Corporation. Howard is not deemed to own
his grandfather’s stock.
b. The stock attribution rules do not apply to stock held by a corporation if the shareholder owns
less than 50% of the stock in that corporation. Thus, Howard would only own 1,000 shares,
600 shares directly and 400 shares owned by his mother (300 shares) and son (100 shares).
c. Howard would now own 1,400 shares in Silver, the 1,350 shares as computed in a. above plus
50 shares as a result of his 25% partnership interest [200 (shares owned by Yellow Partnership)
× 25% (Howard’s interest in the partnership)].
44. a. The distribution does not satisfy the qualifying stock redemption provisions; thus, Shonda has
$225,000 of dividend income. After the redemption, Shonda owns 52.4% of the Rook shares
outstanding [550 (postredemption shares owned) ÷ 1,050 (postredemption shares
outstanding)]. This postredemption ownership interest fails the requirements for a
disproportionate redemption or a complete termination redemption. Also, since Shonda still
has dominant control of Rook, there has not been a “meaningful reduction” of her ownership
interest in Rook. Thus, the transaction fails to qualify as a not essentially equivalent
redemption. Shonda’s basis in the 450 shares redeemed attaches to the basis in her remaining
Rook shares. Thus, Shonda has a $50,000 basis in her remaining 550 shares.
b. The distribution qualifies as a disproportionate redemption; thus, Shonda has a recognized

long-term capital gain of $270,000 [$300,000 (amount realized) – $30,000 (basis in shares
redeemed)]. After the redemption, Shonda has an ownership interest in Rook of 44.4% [400
(postredemption shares owned) ÷ 900 (postredemption shares outstanding)]. This ownership
interest is less than 80% of her original ownership [44.4% < 53.4% (80% × 66.7%)] and less
than 50% of the total combined voting power.
45. Hoffman, Raabe, Maloney, Young, & Smith, CPAs

5191 Natorp Boulevard
Mason, OH 45040
April 30, 2014
Lana Johnson
1000 Main Street
St. Paul, MN 55166
Dear Lana:
This letter is in response to your questions concerning a possible redemption of shares of stock you
own in Stork Corporation. Currently, you own 400 shares of Stork common stock, and the remaining
outstanding shares are owned by Lori Jones (your mother), 200 shares, and Leo Jones (your brother),
400 shares. You paid $200 per share for your stock eight years ago. You are interested in reducing your
stock ownership in Stork via a stock redemption that would pay you $1,000 per share, the fair market
value of the stock. Stork Corporation (E & P of $850,000) would distribute cash for the entire
redemption transaction. You have asked us to determine the minimum number of shares that you would
have to redeem in order to obtain favorable long-term capital gain treatment, and the overall tax
consequences of such a redemption to both you and Stork Corporation. Our conclusion is based upon
the facts as outlined in your April 22 letter. Any change in facts may cause our conclusions to be
inaccurate.
In the redemption transaction, you will be deemed to own the shares owned by your mother, Lori. As
such, your current ownership interest is 60% {[400 shares (owned directly) + 200 shares (owned by
your mother)] ÷ 1,000 shares outstanding}. To obtain long-term capital gain treatment on a redemption,
your postredemption ownership must be less than 50% of the total remaining shares outstanding, and
less than 80% of your preredemption ownership of 60% (i.e., less than 48%). The minimum number of
shares that you must redeem to obtain the desired result is 231 shares. A redemption of 231 shares
would satisfy the postredemption ownership tests. After the redemption, your ownership interest of
47.98% [369 shares (169 shares owned directly plus your mother’s 200 shares) ÷ 769 shares (Stork
shares outstanding after redemption)] satisfies both the 50% and 80% tests.
The redemption of 231 shares would result in a long-term capital gain to you in the amount of $184,800
[$231,000 (redemption proceeds) – $46,200 (cost of shares redeemed)]. The redemption would result
in a reduction of Stork Corporation’s E & P in the amount of $196,350 [$850,000
(E & P preredemption) × 23.1% (percentage of shares outstanding represented by your shares
redeemed)].
Should you need additional information or need to clarify our conclusion, do not hesitate to call on me.
Sincerely,
Marilyn C. Stephenson,
CPA Partner
TAX FILE MEMORANDUM

DATE: April 30, 2014
FROM: Marilyn C. Stephenson

SUBJECT: Lana Johnson
Today I advised Lana Johnson with respect to her April 22 letter. She is interested in reducing her
ownership interest in Stork Corporation (E & P of $850,000) in a stock redemption that would provide
her long-term capital gain treatment. Stork would pay Lana $1,000 for each share of the corporation’s
stock, the estimated fair market value of the stock. Currently, Stork Corporation has 1,000 shares of
stock outstanding owned by the following individuals: Lana Johnson, 400 shares; Lori Jones (Lana’s
mother), 200 shares; and Leo Jones (Lana’s brother), 400 shares. Lana paid $200 per share for the stock
eight years ago. She has asked us to determine the minimum number of shares that she would have to
redeem in order to obtain favorable long-term capital gain treatment, and the overall tax consequences
of such a redemption to both her and Stork Corporation.
At issue: What is the minimum number of shares that must be redeemed to qualify for sale or exchange
treatment for Lana? What are the tax consequences to Lana and Stork Corporation upon such a
redemption?
Conclusion: For purposes of a stock redemption, the shares owned by Lana’s mother, Lori, are deemed
to be owned by Lana. (The shares owned by Lana’s brother, Leo, are not considered owned by her
under the § 318 attribution rules.) Thus, Lana is deemed to own 60% of the Stork shares prior to any
redemption {[400 shares (owned directly) + 200 shares (owned indirectly from Lori)] ÷ 1,000 shares
outstanding}. Using an algebraic formula, it is determined that Lana must redeem a minimum of 231
shares in order to satisfy the 50% and 80% postredemption ownership tests of a disproportionate
redemption under § 302(b)(2).
(600 – X) ÷ (1,000 – X) < 60% × 80%
To solve X:
(600 – X) ÷ (1,000 – X) = 48%
Multiply both sides of the equation by (1,000 – X) to get: (600 – X) = .48(1,000 – X)
(600 – X) = 480 – .48X
120 = .52X
231 (rounded up) = X
A redemption of 231 shares would satisfy both of the postredemption ownership tests. After the
redemption, Lana’s ownership interest of 47.98% [369 shares (169 shares owned directly plus Lori’s
200 shares) ÷ 769 shares (Stork shares outstanding after redemption)] satisfies both the 50% and 80%
tests.
A redemption of 231 shares in Stork would result in a long-term capital gain to Lana in the amount of
$184,800 [$231,000 (amount realized) – $46,200 (basis of shares redeemed)]. The redemption would
result in a reduction of Stork Corporation’s E & P in the amount of $196,350 [$850,000 (E & P
preredemption) × 23.1% (percentage of shares outstanding represented by the shares redeemed)].
46. a. The redemption cannot qualify as a complete termination redemption. Angelica is deemed to
own Dean’s 1,500 shares or 75% (1,500 ÷ 2,000) of the remaining shares outstanding. (There
is no attribution under § 318 for stock owned by an uncle.) The family attribution waiver does
not apply because Angelica’s position as a director of Cyan Corporation is a prohibited interest.
Even if the other requirements for the family attribution waiver are satisfied (e.g., Angelica
files the required agreement with the IRS), Angelica has a prohibited interest within the 10-
year postredemption period.
b. The redemption can qualify as a complete termination redemption. A creditor interest is not a
prohibited interest. Thus, if the other requirements for the family attribution waiver are
satisfied, the redemption completely terminates Angelica’s ownership interest in Cyan.
c. The redemption can qualify as a complete termination redemption. Dean’s employment as

president of Cyan Corporation is not a prohibited interest for Angelica. Thus, if the other
requirements for the family attribution waiver are satisfied, the redemption completely
terminates Angelica’s ownership interest in Cyan.
d. The redemption cannot qualify as a complete termination redemption. Angelica is deemed to

own Dean’s 1,500 shares or 75% (1,500 ÷ 2,000) of the remaining shares outstanding. The
family attribution waiver does not apply because Angelica’s acquisition of Cyan stock by gift
is a prohibited interest. Even if the other requirements for the family attribution waiver are
satisfied, Angelica has acquired a prohibited interest within the 10-year postredemption period.
47. a. With respect to the distribution, Lori would have dividend income of $600,000 and Swan
Corporation would reduce its E & P by $600,000. As a result of the stock transaction, Lori
would have a basis of $600,000 in the newly acquired 500 shares and become the sole
shareholder of Swan. Robert would have a capital gain of $515,000 [$600,000 (amount
realized) – $85,000 (basis in stock)] on the sale. The stock transaction would not affect Swan.
b. The transaction would constitute a complete termination redemption and result in a capital gain
of $515,000 [$600,000 (amount realized) – $85,000 (basis in stock)] to Robert. (Siblings are
not related parties under § 318; thus, Robert’s continued employment with Swan is irrelevant
and a complete termination redemption results.) Lori would become the sole shareholder as a
result of the redemption. Swan would reduce its E & P by $500,000 [$l million (E & P at time
of redemption) × 50% (interest redeemed)].
48. a. The redemption will qualify as a partial liquidation as to Sultan but not as to Turquoise
Corporation. A partial liquidation under § 302(b)(4) is limited to noncorporate shareholders.
The distribution of proceeds from a sale of a trade or business that Lime Corporation owned
and operated for the last five years (i.e., a qualified trade or business), coupled with the
continued operation of another qualified trade or business after the distribution, satisfies the
termination of a business test. Sultan will receive sale or exchange treatment on the redemption
resulting in a recognized gain of $300,000 [$350,000 (amount realized) – $50,000 (basis in
stock redeemed)].
Turquoise Corporation will have dividend income of $350,000, reduced by a dividends
received deduction of $280,000 (80% × $350,000). The basis of the redeemed shares ($50,000)
is added to the basis of Turquoise’s remaining 750 shares of Lime stock.
Lime Corporation will have a recognized gain of $200,000 [$700,000 (amount realized) –
$500,000 (basis)] on the sale of the trade or business. Lime will reduce its E & P by $262,500
[12.5% (percentage of shares outstanding redeemed from Sultan) × $2.1 million (E & P as of
the date of distribution)] for the distribution to Sultan. Further, Lime will reduce its E & P by
$350,000 for the distribution to Turquoise.
b. The distribution will not qualify as a partial liquidation to Sultan because Lime Corporation
has not satisfied the not essentially equivalent to a dividend requirement. The stock investment
distributed does not represent a genuine contraction of Lime’s business nor does it satisfy the
termination of a business test. The stock it holds for investment purposes does not constitute a
trade or business. Both Sultan and Turquoise Corporation will have dividend income of
$350,000 (fair market value of stock distributed to each). Turquoise Corporation will have a
dividends received deduction of $280,000 (80% × $350,000). Each shareholder will have a
basis of $350,000 in the stock received. The two shareholders will add the basis of the redeemed
shares ($50,000) to that of their remaining shares of Lime stock.
Lime Corporation will have a recognized gain of $275,000 [$700,000 (amount realized) –
$425,000 (basis in stock)] on the distribution of the stock. Lime will increase its E & P by
$275,000 for the gain and will reduce its E & P by $700,000 for the distributions.
49. The fair market value of the Iris Corporation stock included in Raul’s estate exceeds 35% of the value
of the adjusted gross estate ($2.5 million ÷ $7 million = 35.7%). Thus, the distribution qualifies as a §
303 redemption to pay death taxes to the extent of the death taxes and funeral and administration
expenses, or $1 million. The remainder of the distribution, $1.5 million, does not qualify for sale or
exchange treatment under § 303; instead, that portion of the distribution must be tested under the § 302
qualifying stock redemption provisions. Under the § 318 stock attribution rules, shares owned by an
heir are deemed to be owned in full by the estate. Therefore, Raul’s estate is deemed to own the Iris
shares owned by its sole heir, Monica, or 100% of the Iris stock outstanding after the redemption. Thus,
$1.5 million of the distribution satisfies none of the § 302 qualifying stock redemption provisions and,
instead, is treated as a dividend distribution.
The estate’s basis in the Iris stock is stepped up to the $2.5 million fair market value at date of death.
As to the Iris stock redeemed under § 303 for $1 million, the estate recognizes no gain or loss [$1
million (proceeds qualifying for § 303 treatment) – $1 million (estate’s stepped-up basis in shares)]. As
to the $1.5 million portion of the distribution treated as a nonqualified stock redemption (dividend
income), the estate’s basis in the redeemed shares ($1.5 million stepped-up basis) attaches to the basis
of Monica’s stock in Iris Corporation.
50. Since Bridgett owned a 20% or more interest in both Crane Corporation and Eagle Corporation, the fair
market values of the two stocks are combined for purposes of the 35% of adjusted gross estate test. The
redemption qualifies under § 303 [$2,750,000 (combined stock value) exceeds $2,625,000 (35% × $7.5
million adjusted gross estate)] to the extent of $750,000, the amount of death taxes and funeral and
administration expenses. Since the estate’s basis in the Crane shares is stepped up to fair market value
at date of death, the estate has no gain or loss on the stock redemption [$750,000 (proceeds qualifying
for § 303 treatment) – $750,000 (estate’s basis in shares)].
51. a. The transaction does not qualify for sale or exchange treatment. As a result of the stock
attribution rules, Tammy is deemed to own the shares owned by Jeremy, her grandson.
Tammy’s postredemption ownership interest of 52.9% [450 (150 postredemption shares owned
directly + Jeremy’s 300 shares) ÷ 850 (postredemption shares outstanding)] fails to satisfy any
of the qualifying stock redemption provisions. Tammy therefore will recognize dividend
income equal to the amount of the distribution, or $75,000. The $7,500 basis in the stock
redeemed attaches to Tammy’s basis of her remaining shares of Broadbill stock. Broadbill
Corporation’s E & P is reduced by $75,000, the amount of the dividend distribution.
b. The transaction qualifies for sale or exchange treatment as a disproportionate redemption.
There is no attribution under § 318 for stock owned by siblings. Tammy’s postredemption
ownership interest of 17.6% [150 (postredemption shares owned by Tammy) ÷ 850
(postredemption shares outstanding)] satisfies both the 80% test [17.6% is less than 24% (80%
× 300/1,000)] and the 50% test. As a result, Tammy will recognize a long-term capital gain of
$67,500 [$75,000 (amount realized) – $7,500 (basis in shares redeemed)]. Broadbill
Corporation’s E & P is reduced by $75,000, the amount of the distribution {$75,000 is less
than the limitation of $97,500 [15% (percentage of shares outstanding redeemed from Tammy)
× $650,000 (E & P as of the date of distribution)]}.
52. Hoffman, Raabe, Maloney, Young, & Smith, CPAs
5191 Natorp Boulevard
Mason, OH 45040
December 5, 2014
Crane Corporation
506 Wall Street
Winona, MN 55987
Dear President of Crane Corporation:
This letter is in response to your questions concerning Crane Corporation’s tax consequences arising
out of a redemption of its stock. Crane Corporation had 2,000 shares of stock outstanding when it
redeemed 500 shares for $370,000. The shareholder received sale or exchange treatment on the
redemption. Crane had paid-in capital of $300,000 and E & P of $1.2 million at the time of the
redemption. As a result of the redemption transaction, Crane Corporation incurred $13,000 of
accounting and legal fees. Crane also had $18,500 of interest expense on debt incurred to finance the
redemption. Our conclusions are based upon the facts as outlined in your November 28 letter. Any
change in facts may cause our conclusions to be inaccurate.
Crane Corporation would reduce its E & P in the amount of $300,000 as a result of the redemption.
This represents a 25% decrease in the amount of the E & P corresponding to the 25% stock redemption.
When a stock redemption results in sale or exchange treatment for the shareholder, the
E & P account of a corporation is reduced in an amount not in excess of the ratable share of the E & P
of the distributing corporation attributable to the stock redeemed. The $70,000 balance of the
redemption distribution would reduce the paid-in capital of the corporation.
No deduction is allowed for expenditures incurred by a corporation in connection with the redemption
of its stock. As such, none of the $13,000 of accounting and legal fees is deductible. However, the
$18,500 of debt-financed interest expense is deductible.
Should you need additional information or need to clarify our conclusions, do not hesitate to call on
me.
Sincerely,
Astia Jackson, CPA

Partner
TAX FILE MEMORANDUM
DATE: December 5, 2014
FROM: Astia Jackson
SUBJECT: Crane Corporation
Today I advised the president of Crane Corporation with respect to its November 28 letter. Crane
Corporation had 2,000 shares of stock outstanding. It redeemed 500 shares for $370,000, when it had
paid-in capital of $300,000 and E & P of $1.2 million. The redemption qualified for sale or exchange
treatment for the shareholder. Crane incurred $13,000 of accounting and legal fees with respect to the
redemption transaction, and $18,500 of interest expense on debt incurred to finance the redemption.
At issue: What is the reduction in Crane Corporation’s E & P as a result of the redemption? Also, are
the redemption expenditures deductible by Crane?
Conclusion: Under § 312(n)(7), the E & P account of a corporation is reduced by a qualifying stock
redemption in an amount not in excess of the ratable share of the E & P of the distributing corporation
attributable to the stock redeemed. Since Crane Corporation redeemed 25% of its stock, the reduction
in E & P is 25% of the E & P account, or $300,000. Section 162(k) specifically disallows the
deductibility of redemption expenditures. As such, none of the $13,000 of accounting and legal fees is
deductible by Crane. However, the debt-financed interest expense is deductible (under § 163).
53. a. Neither Ramon nor Sophie recognizes income upon receipt of the preferred stock. It is a
nontaxable stock dividend under § 305. However, the stock is classified as § 306 stock. The
$100,000 basis in their original common shares is reallocated between the preferred stock and
the common stock based on the relative fair market value of each. The basis is reallocated as
follows:
Fair market value of common: 2,000 × $150 = $300,000

Fair market value of preferred: 1,000 × $75 = 75,000
$375,000
Basis of common: 300/375 × $100,000 = $80,000
Basis of preferred: 75/375 × $100,000 = $20,000
b. A sale of the preferred stock to Anthony will produce $75,000 of ordinary income, which is
the fair market value of the preferred stock on the date of distribution. The $75,000 will not be
dividend income; thus, the E & P of Gull Corporation will not be reduced as a result of the
distribution. However, the $75,000 is treated as dividend income for purposes of the
preferential tax rate on such income. The $20,000 basis of the preferred stock is added back to
the basis of the common stock, giving a basis in such stock of $100,000 ($80,000 + $20,000).
c. In a redemption of § 306 stock, the shareholder recognizes dividend income to the extent of the
corporation’s E & P on the date of the redemption. Since Gull Corporation has ample
E & P, the entire $75,000 of redemption proceeds will be dividend income to Ramon. The
$20,000 basis in the preferred stock is added back to the basis of Ramon’s common stock,
giving a basis in such stock of $100,000 ($80,000 + $20,000). Gull’s E & P is reduced by the
$75,000 dividend distribution.
54. Martin owns 50% or more in both Black Corporation and in Blue Corporation; thus, § 304 applies to
the transaction. The sale is treated as a redemption of the stock of Black Corporation. To determine
ownership before and after the redemption, reference is made to Martin’s ownership in Blue
Corporation. After the sale, Martin continues to own, directly and indirectly, 50% or 500 shares of Blue
Corporation: 300 shares directly + 200 shares indirectly from Black [100% × 200 (shares owned by
Black)]. Martin’s ownership interest was unchanged as a result of the stock sale; thus, none of the
qualifying stock redemption provisions are satisfied. The $300,000 will be treated as a dividend to the
extent of E & P of Black Corporation and then to the extent of E & P of Blue Corporation. Thus, there
is adequate E & P to cause the entire $300,000 to be taxed as a dividend. The $120,000 basis Martin
had in the Blue stock sold to Black Corporation attaches to his basis in the Black stock. Black
Corporation has a basis of $120,000 in its Blue stock.
55. a. In the case of Dove Corporation, the $40,000 realized loss [$260,000 (fair market value) –
$300,000 (land basis)] is not recognized on the nonliquidating distribution of the land under
§ 311(a). As to Julia, her $15,000 loss realized [$260,000 (fair market value of land) – $275,000
(stock basis)] in the qualifying stock redemption is disallowed under § 267 because Julia and
Dove Corporation are related parties. Under that provision, Julia is deemed to own the stock of
her sister (Maxine) and her daughter (Janine), or 100% of the Dove stock in total. Her basis in
the land is its fair market value, or $260,000.
b. The $40,000 loss realized by Dove Corporation on the distribution of the land is again
disallowed. In this case, the loss is disallowed under the related-party loss limitation. Since
Julia is deemed to own 100% of the stock of Dove, this is a distribution of loss property to a
related party and such distribution is not pro rata. As to Julia, her $15,000 loss is recognized.
Section 267 does not apply in the case of liquidating distributions. Her basis in the land is its
fair market value, or $260,000.
56. a. Oriole Corporation has a recognized long-term capital gain of $270,000 on the distribution.
Under § 336(b), when property distributed in a complete liquidation is subject to a liability of
the liquidating corporation, the fair market value of that property is treated as not being less
than the amount of the liability. Thus, the $250,000 adjusted basis in the land is subtracted from
the $520,000 liability for a gain of $270,000.
b. Oriole Corporation would recognize gain of $240,000 [$490,000 (fair market value) –
$250,000 (basis)]. Under the general rule of § 336(a), the land is treated as if it were sold for
its fair market value. Since the land was a capital asset held for more than one year, Oriole has
a $240,000 long-term capital gain.
57. The related-party loss limitation applies and Mulberry Corporation does not recognize the $75,000 loss
realized on the distribution of the land [$575,000 (fair market value) – $650,000 (basis in land)]. There
is a distribution of loss property to a related party and the distribution is not pro rata. For purposes of
the related-party loss limitation, Anar is deemed to own the shares of Archana (her mother), or 100%
of the stock in Mulberry Corporation. Anar recognizes a gain of $50,000 on the liquidating distribution
[$150,000 (fair market value net of liability) – $100,000 (basis in stock), and has a basis in the land
equal its fair market value of $575,000.
58. Lory Corporation will recognize the entire $290,000 loss realized on the sale of the land [$500,000
(amount realized) – $790,000 (basis in land)]. (The basis step-down rule does not apply, as there is no
net built-in loss on the § 351 transfer to Lory; thus, Lory will have a basis of $790,000 in the land.) The
built-in loss limitation does not apply to the sale, as there was a clear business reason for transferring
the land to Lory Corporation. Further, the related-party loss limitation does not apply to sales.
59. Roadrunner Corporation would recognize a loss of $175,000 [$400,000 (fair market value on date of
distribution) – $575,000 (basis of land)]. The basis step-down rules of § 362(e)(2) would apply to the
§ 351 transaction, and Roadrunner would have a basis in the land of $575,000 [$650,000 (transferor
shareholder’s basis) – $75,000 (net built-in loss of property transferred)]. The recognized loss of
$175,000 represents the decline in the value of the land that occurred after the date of the § 351 transfer.
The land was acquired by Roadrunner in a § 351 transaction within 2 years of the adoption of the plan
of liquidation and there was no clear business purpose for the acquisition. However, the built-in loss
limitation applies only to the extent that a property’s basis exceeds its fair market value after application
of the basis step-down rules. In the case of the land, no built-in loss remains after the basis step-down.
The related-party loss limitation does not apply to a distribution of property to a 15% shareholder
(Rhonda).
60. a. If Pink Corporation distributes all the land to Maria, none of the $220,000 loss realized
[$500,000 (fair market value) – $720,000 (basis)] on the distribution will be recognized since
Maria is a related party and the land is disqualified property.
b. If all the land is distributed to Paul, Pink Corporation will have a recognized loss of $220,000.
The land was valued at more than its basis on the date of the § 351 transfer to Pink; thus, the
built-in loss limitation does not apply. Because Paul is an unrelated party, the related-party loss
limitation does not apply.
c. Even though the distribution is pro rata, the property is disqualified property; thus, the $187,000
loss on the distribution to Maria (i.e., 85% × $220,000), a related party, would be disallowed.
Of the $220,000 loss, 15% (Paul’s interest), or $33,000, would be allowed. For the reasons noted
in option b. above, the loss limitations do not apply to the distribution to Paul.
d. In this case, 50% of the $220,000 realized loss, or $110,000, would be disallowed. The property
is disqualified property; thus, the loss on the distribution to Maria, a related party, would be
disallowed. The remaining $110,000 loss will be recognized. For the reasons noted in option
b. above, the loss limitations do not apply to the distribution to Paul.
e. Because the property does not have a built-in loss on the date of the transfer to the corporation,
the built-in loss limitation does not apply. Further, the related-party loss limitation does not
apply to a sale of property. Upon the sale, Pink Corporation would recognize the entire
$220,000 loss.
Pink Corporation should either distribute the land to Paul (option b.) or sell it and distribute the
cash (option e.).
61. a. The answer would not change. The land is disqualified property that is distributed to a related
party; thus, the entire $220,000 loss realized is disallowed under the related-party loss
limitation.
b. The property had a built-in loss of $90,000 [$630,000 (fair market value) – $720,000 (basis)]
when it was transferred to Pink Corporation. Further, the transfer occurred within 2 years of
the date the plan of liquidation was adopted. Unless Pink can rebut the presumption of a tax
avoidance purpose for the transfer, the built-in loss of $90,000 is disallowed. The remaining
$130,000 loss will be recognized. Because Paul is an unrelated party, the related-party loss
limitation does not apply to a distribution to him. If Pink Corporation can establish a business
reason for the transfer of the property to the corporation and rebut the 2-year presumption rule,
the entire $220,000 loss would be recognized.
c. The loss on the property distributed to Maria, or $187,000, will be disallowed entirely because
it is a distribution of disqualified property to a related party. Unless Pink Corporation can rebut
the presumption of a tax avoidance purpose for the transfer, an additional $13,500 of the loss
[$90,000 (built-in loss) × 15% (Paul’s interest)] will be disallowed. As a result, $19,500 of the
loss will be recognized [$130,000 (post-transfer loss) × 15% (Paul’s interest)]. If Pink
Corporation can rebut the 2-year presumption rule, $33,000 of loss would be recognized
[$220,000 (total loss) × 15% (Paul’s interest)].
d. The loss on the distribution of disqualified property to Maria, or $110,000, will be disallowed.
Of the remaining $110,000 loss, 50% of the built-in loss of $90,000, or $45,000, will be
disallowed unless Pink Corporation can demonstrate a business purpose for the transfer. If Pink
can rebut the 2-year presumption rule, $110,000 of the loss, or the portion pertaining to the
distribution to Paul, would be recognized.
e. If Pink Corporation cannot show a business purpose for the transfer, the built-in loss of $90,000
would be disallowed. The remaining $130,000 loss would be recognized. If Pink can rebut the
2-year presumption rule, the entire $220,000 loss would be recognized. The related-party loss
limitation does not apply to a sale of property.
Pink Corporation should either distribute the land to Paul (option b.) or sell it and distribute the proceeds
(option e.).
Note: The basis step-down rule does not apply, as there is no net built-in loss on the § 351 transfer;
thus, Pink will have a basis of $720,000 in the land.
62. Scarlet Corporation will recognize a long-term capital loss of $35,000 [$390,000 (fair market value) –
$425,000 (basis)] on the liquidating distribution of land. Neither the related-party loss limitation nor
the built-in loss limitation would apply to the loss realized on the distribution. Jake will recognize a
long-term capital gain of $80,000 [$140,000 (fair market value of land less liability) – $60,000 (basis
of stock)]. Jake will have a basis of $390,000 in the land.
63. The tax results of these transactions to Helen are as follows:
• Helen, a cash basis taxpayer, may defer gain on the receipt of the notes to the point of collection
under the installment method.
• Helen must allocate the basis ($50,000) of her stock in Purple Corporation between the cash and
the installment notes. Using the relative fair market value approach, 20% [$100,000 (amount of
cash) ÷ $500,000 (total distribution)] of $50,000 (basis in the stock), or $10,000, is allocated to the
cash, and 80% [$400,000 (FMV of the notes) ÷ $500,000 (total distribution)] of $50,000 (basis in
the stock), or $40,000, is allocated to the notes.
• Helen must recognize gain of $90,000 [$100,000 (cash received) – $10,000 (allocated basis of the
cash)] in the year of the liquidation.
• Since Helen’s gross profit on the notes is $360,000 [$400,000 (FMV of notes) – $40,000 (allocated
basis of the notes)], the gross profit percentage is 90% [($360,000 (gross profit) ÷ $400,000 (FMV
of notes)]. Thus, Helen must report a gain of $72,000 [$80,000 (amount of annual payment) × 90%
(gross profit percentage)] on the collection of each note over the next five years.
• The interest element is accounted for separately.
64. Magenta does not recognize the gain on the distribution of assets to Fuchsia, its parent corporation.
Further, the $25,000 loss realized [$50,000 (fair market value) – $75,000 (basis)] on the land
distribution to Marta, a minority shareholder, is not recognized.
Fuchsia recognizes no gain or loss in the liquidation, and it has a carryover basis of $620,000 in the
assets received. Magenta’s tax attributes (e.g., E & P) also carry over to Fuchsia. Fuchsia’s basis in the
Magenta stock disappears.
Marta recognizes a $20,000 gain [$50,000 (amount realized) – $30,000 (basis of stock)] in the
liquidation, and she has a basis in the land of $50,000.
65. a. Section 332 applies to the liquidation and Ivory Corporation (subsidiary) recognizes no gain
(or loss) on the distribution of the cash and inventory to Gold Corporation (parent). In
liquidations otherwise governed by § 332, a subsidiary corporation recognizes gain but not loss
on distributions to a minority shareholder; thus, Ivory does not recognize the $150,000 loss
realized on the distribution of the equipment to Imelda (minority shareholder). Gold
Corporation recognizes no gain or loss on the liquidation and takes a basis of $80,000 in the
inventory. Gold’s basis in its Ivory Corporation stock is eliminated. Imelda recognizes a gain
of $25,000 ($200,000 amount realized – $175,000 basis in stock), and she has a basis of
$200,000 in the equipment.
b. Again, Section 332 applies and Ivory recognizes no gain or loss on the distribution of the cash
and equipment to Gold Corporation. However, Ivory Corporation does recognize the gain of
$120,000 ($200,000 fair market value – $80,000 basis) on the distribution of the inventory to
Imelda. Gold Corporation recognizes no gain or loss on the liquidation and takes a basis of
$350,000 in the equipment. Gold’s basis in its Ivory Corporation stock is eliminated. Imelda
recognizes a gain of $25,000 ($200,000 amount realized – $175,000 basis in stock), and she
has a basis of $200,000 in the inventory.
66. Green Corporation recognizes no gain on the transfer of the land to satisfy its indebtedness to Orange
Corporation. Transfers by a subsidiary corporation pursuant to a § 332 liquidation are subject to the
nonrecognition rules of § 337. Orange Corporation, however, will recognize a gain of $50,000
[$400,000 (fair market value of the land) – $350,000 (basis in the bonds)].
67. A qualified stock purchase occurs when one corporation acquires, in a taxable transaction, stock
representing at least 80% of the total voting power and at least 80% of the value of another corporation
within a 12-month period. For purposes of Lilac Corporation, a qualified stock purchase occurs with
the May 2, 2014, purchase [85% = 25% (July 22, 2013) + 40% (March 25, 2014) + 20% (May 2, 2014)].
The § 338 election must be made by the fifteenth day of the ninth month beginning after the month in
which a qualified stock purchase occurs. Since Lilac’s qualified stock purchase date is May 2, 2014,
the election must be filed by February 15, 2015.
68. a. Amazon Corporation (subsidiary) is deemed to have sold its assets on April 29, 2014 (qualified
stock purchase date), for the ADSP of $1.4 million, which results in a recognized gain of
$600,000 [$1.4 million (ADSP) – $800,000 (basis in assets)], and tax of $204,000 ($600,000
× 34%). Amazon is treated as a new corporation (e.g., E & P of $0) that purchased the assets
for $1.4 million (AGUB) as of April 30, 2014. Amazon Corporation now has a $1.4 million
basis in the assets, and its holding period in the assets begins April 30, 2014. There are no tax
consequences of the § 338 election as to Auk Corporation (parent). Auk’s basis in the Amazon
Corporation stock remains unchanged at $1.2 million.
b. The liquidation is a § 332 parent-subsidiary liquidation. Under § 337(a), Amazon Corporation

recognizes no gain or loss on the liquidating distribution of assets to Auk Corporation. Under
§ 332(a), Auk Corporation recognizes no gain or loss on the receipt of the assets in liquidation
of Amazon Corporation. Auk’s basis in the assets is the stepped-up basis of $1.4 million, and
its holding period for the assets begins on April 29, 2014. Auk Corporation’s basis in the
Amazon Corporation stock disappears. Auk Corporation acquires Amazon Corporation’s tax
attributes (e.g., E & P), all of which are zero as a result of the § 338 election.
SOLUTIONS TO ETHICS & EQUITY FEATURES
Convertible Preferred Stock—Conversion or Redemption? (p. 6-9). Members of a board of directors serve
in a fiduciary capacity on behalf of corporate shareholders. They are subject to good faith and fair dealing
standards with respect to the investors in the corporation’s convertible preferred stock. Given the recently
developed invention, a conversion of the preferred stock to common stock appears to be more favorable for the
preferred shareholders than having their shares redeemed. A premium call price is typical of most callable
preferred stock, and the presence of a premium on this preferred stock likely does not relieve the board of their
fiduciary duties. The preferred shareholders should be informed of the new invention before any redemption
transaction transpires. Even though the stock of the corporation is not selling publicly, the corporation may be
subject to the anti-fraud provisions of the Securities Acts for a small offering to members of the public.
Nonetheless, it appears the board of directors did not act in an ethical manner.
Transferee Liability for Tax Deficiency of Liquidated Corporation (p. 6-23). The IRS can assess the entire
deficiency against Gloria under the transferee liability provision of § 6901. There is no requirement that the
IRS assess the deficiency against the shareholders based on their pro rata share of liquidating distributions. A
shareholder’s liability for a corporation’s deficiency is limited to his or her share of assets received in
liquidation, however. As a result, one shareholder can get stuck with the entire bill for a liquidated corporation’s
deficiency. Such a result may not be equitable, but some recourse does exist to remedy Gloria’s position.
The deficiency paid by Gloria will result in a capital loss deduction for her. The claim of right provision of
§ 1341 applies in determining Gloria’s tax in the year of payment. Gloria may sue Roger Stinson for one-half
of the deficiency, representing the portion of Loon’s deficiency properly allocable to that shareholder.
Unfortunately, this claim is worthless if Gloria is unable to locate Roger or otherwise collect his share of the
deficiency.

South-Western Federal Taxation 2015 Corporations Partnerships Estates and Trusts 38th Edition Hoffman Solutions Manual 1

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

South-Western Federal Taxation 2015 Corporations Partnerships Estates and Trusts 38th Edition Hoffman Solutions Manual 1

Uploaded by

Copyright:

Available Formats

South-Western Federal Taxation 2015

Corporations Partnerships Estates and

Solution Manual: https://testbankpack.com/p/solution-manual-for-south-

Test Bank: https://testbankpack.com/p/test-bank-for-south-western-federal-

CORPORATIONS: REDEMPTIONS AND LIQUIDATIONS

SOLUTIONS TO PROBLEM MATERIALS

1 LO 1 Why sale or exchange treatment limited to Unchanged 1

7 LO 1 Basis of property received in stock Unchanged 7

21 LO 1, 2, 6 Tax consequences of redemption to Unchanged 21

43 LO 1 Stock attribution rules Unchanged 43

62 LO 4 Complete liquidation: tax consequences to Unchanged 62

1 Effect of filing a late family attribution waiver Unchanged 1

recognizes $50,000 gain. tax of $204,000; new basis in assets of

7. The statement is correct. A shareholder’s basis in property received in a nonliquidating distribution,

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

• Whether the redemption qualifies for sale or exchange treatment.

• Whether Barry is related to any shareholder of Pheasant Corporation.

• If Barry is related to a shareholder of Pheasant, will he continue employment with the

• Pheasant’s E & P at the time of the distribution.

• Whether Pheasant incurred any (nondeductible) redemption expenditures as a result of the

19. • Valuation of Angie’s estate.

• Whether the executor should elect the alternate valuation date.

• If a redemption of Bluebird stock is advantageous, whether noncash property should be distributed

• Whether Ann should purchase the estate’s shares in Bluebird.

• Marital and other estate deductions.

• Due date of estate tax return.

• Income tax return for estate.

• Effect of any dividend or redemption distribution on Pink Corporation’s E & P.

• Deductibility of any expenditures incurred by Pink Corporation in connection with a stock

• Whether Donna and Steven live in a community property state.

• Tax consequences of alimony, child support, and the property settlement.

• Dependency deductions for the children.

• Deductibility of legal costs associated with the divorce.

• Donna’s and Steven’s filing statuses.

• The corporate business has been unsuccessful.

• The shareholders wish to acquire the corporation’s assets.

b. The distribution qualifies as a disproportionate redemption; thus, Shonda has a recognized

45. Hoffman, Raabe, Maloney, Young, & Smith, CPAs

TAX FILE MEMORANDUM

FROM: Marilyn C. Stephenson

c. The redemption can qualify as a complete termination redemption. Dean’s employment as

d. The redemption cannot qualify as a complete termination redemption. Angelica is deemed to

Astia Jackson, CPA

TAX FILE MEMORANDUM

DATE: December 5, 2014

FROM: Astia Jackson

SUBJECT: Crane Corporation

Fair market value of common: 2,000 × $150 = $300,000

63. The tax results of these transactions to Helen are as follows:

b. The liquidation is a § 332 parent-subsidiary liquidation. Under § 337(a), Amazon Corporation

SOLUTIONS TO ETHICS & EQUITY FEATURES

You might also like