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Exam 13: Corporate Nonliquidating and Liquidating Distributions

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Question 61

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El Toro Corporation declared a common stock distribution to all shareholders of record on June 30,year 1.Shareholders will receive 1 share of El Toro stock for each 2 shares of stock they already own.Raoul owns 300 shares of El Toro stock with a tax basis of $60 per share.The fair market value of the El Toro stock was $100 per share on June 30,year 1.What are the tax consequences of the stock distribution to Raoul?

A) $0 dividend income and a tax basis in the new stock of $100 per share.
B) $0 dividend income and a tax basis in the new stock of $60 per share.
C) $0 dividend income and a tax basis in the new stock of $40 per share.
D) $15,000 dividend and a tax basis in the new stock of $100 per share.

E) B) and C)
F) A) and D)

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Question 62

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Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder.Evergreen's tax basis in the land is $50,000.Evergreen will report a gain of $150,000 on the distribution regardless of whether its earnings and profits are positive or negative.

A) True
B) False

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Question 63

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Comet Company is owned equally by Pat and his sister Pam,each of whom hold 100 shares in the company.Comet redeems 50 of Pam's shares on December 31,year 1,for $1,000 per share in a transaction that Pam treats as an exchange for tax purposes.Comet has total E&P of $160,000 on December 31,year 1.What are the tax consequences to Comet as a result of the stock redemption?

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

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

Longhorn Company reports current E&P of $100,000 in year 1 and accumulated E&P at the beginning of the year of negative $200,000.Longhorn distributed $300,000 to its sole shareholder on January 1,year 1.The shareholder's tax basis in his Longhorn stock is $100,000.How is the distribution treated by the shareholder in year 1?

Sunapee Corporation reported taxable income of $700,000 from operations for year 1.During the year,the company made a distribution of land to its sole shareholder,Jean McCarthy.The land's fair market value was $125,000 and its tax and E&P basis to Sunapee was $75,000.Jean assumed a mortgage attached to the land of $25,000.Compute Sunapee's total taxable income and federal income tax paid as a result of the distribution.Using your solution,compute Sunapee's current E&P for year 1.

The recipient of a nontaxable stock distribution will have a zero tax basis in the stock received in the distribution.

Townsend Corporation declared a 1-for-1 stock split to all common stock shareholders of record on December 31,year 1.Townsend reported current E&P of $400,000 and accumulated E&P of $1,000,000.The total fair market value of the stock distributed was $500,000.Regina Williams owned 1,000 shares of Townsend common stock with a tax basis of $200 per share ($200,000 total).The fair market value of the common stock was $300 per share on December 31,year 1.What is Regina's income tax basis in the new and existing common stock she owns in Townsend,assuming the distribution is nontaxable?

Husker Corporation reports current E&P of negative $200,000 in year 1 and accumulated E&P at the beginning of the year of $300,000.Husker distributed $200,000 to its sole shareholder on December 31,year 1.The shareholder's tax basis in her stock in Husker is $50,000.How is the distribution treated by the shareholder in year 1?

Montclair Corporation had current and accumulated E&P of $500,000 at December 31,year 1.On December 31,the company made a distribution of land to its sole shareholder,Molly Pitcher.The land's fair market value was $200,000 and its tax and E&P basis to Montclair was $50,000.Molly assumed a liability of $25,000 attached to the land.The tax consequences of the distribution to Montclair in year 1 would be (assume a 0 percent marginal tax rate for Montclair) :

Half Moon Corporation made a distribution of $300,000 to Arnold Swartz in partial liquidation of the company on December 31,year 1.Arnold owns 100% of Half Moon Corporation (1,200 shares).The distribution was in exchange for 50% of Arnold's stock in the company (600 shares).At the time of the distribution,the shares had a fair market value of $500 per share.Arnold's income tax basis in the shares was $250 per share.Half Moon had total E&P of $2,000,000 at the time of the distribution.What is the amount and character (capital gain or dividend)of any income or gain recognized by Arnold as a result of the partial liquidation?