Jose holds 1,000 shares of Lotus stock that he purchased for $10,000 several years ago. In a merger of Lotus into Blossom, Inc., Jose exchanges his 1,000 Lotus shares for 1,000 Blossom shares. Both investments are valued at $18 per share. Thus, Jose's sto
Realized Gain: $18,000 - $10,000 (basis) = $8,000
Recognized Gain = $0
Deferred Gain = $8,000
Basis = $18,000 - $8,000 (deferred gain) = $10,000
The exchange of Jose's stock has no tax consequences for Lotus or Blossom.
In a qualifying reorganization, Acquiring Corporation exchanges $800,000 of stock and land with a $200,000 fair market value and a $150,000 basis for all of Target Corporation's assets, which have a $1 million fair market value and a $600,000 basis.
What
Due to the other property (land) it used in the transfer, Acquiring recognizes a $50,000 gain ($200,000 -$150,000) on the reorganization.
In a qualifying reorganization, Acquiring Corporation exchanges $800,000 of stock and land with a $200,000 fair market value and a $150,000 basis for all of Target Corporation's assets, which have a $1 million fair market value and a $600,000 basis.
Assum
If Target distributes the land to its shareholders, it does not recognize gain. If Target retains the land, however, it recognizes gain to the extent of the other property received, $200,000.
Kalla, the sole shareholder of Target Corporation in Example 2, has a $700,000 basis in her stock. She exchanges her Target stock for the $800,000 of Acquiring stock plus the land ($200,000) transferred by Acquiring to Target.
What is Kalla's recognized a
Kalla has a $200,000 recognized gain due to receiving the land (boot). The computations are as follows:
Realized Gain: $1M-700,000 = $300,000
Recognized Gain: $200,000 (Boot)
Postponed Gain: $300K-200K= $100,000
Basis in Acquiring Stock: $800K-100K=$700K
R&W proceeds with its acquisition of BrineCo. Sam acquired a 30% interest in BrineCo 15 years ago for $80,000. He exchanges his BrineCo stock for $25,000 cash and stock in R&W worth $125,000. At the time of the reorganization, BrineCo's E&P is $50,000.
Wh
Sam has a $70,000 realized gain ($150,000 cash and stock received -$80,000 BrineCo stock basis) and a $25,000 recognized gain (cash boot received).
R&W proceeds with its acquisition of BrineCo. Sam acquired a 30% interest in BrineCo 15 years ago for $80,000. He exchanges his BrineCo stock for $25,000 cash and stock in R&W worth $125,000. At the time of the reorganization, BrineCo's E&P is $50,000.
Wh
Sam has a $70,000 realized gain ($150,000 cash and stock received -$80,000 BrineCo stock basis) and a $25,000 recognized gain (cash boot received). Of Sam's recognized gain, the first $15,000 ($50,000 BrineCo E&P x 30%) is taxable as a dividend, and the r
R&W proceeds with its acquisition of BrineCo. Sam acquired a 30% interest in BrineCo 15 years ago for $80,000. He exchanges his BrineCo stock for 10% of the R&W stock with a $100,000 fair market value and $50,000 cash.
Does he qualify for sale or exchange
If Sam had received solely stock, he would have received 15% of the R&W stock. Since Sam owns less than 80% of the stock he would have owned if solely stock had been distributed (10% 15% is 67%) and less than 50% of R&W, he qualifies for sale or exchange
R&W proceeds with its acquisition of BrineCo. Sam acquired a 30% interest in BrineCo 15 years ago for $80,000. He exchanges his BrineCo stock for 10% of the R&W stock with a $100,000 fair market value and $50,000 cash.
What will be his recognized gain?
Sam's realized gain will be $50,000 (his boot or cash received).
R&W proceeds with its acquisition of BrineCo. Sam acquired a 30% interest in BrineCo 15 years ago for $80,000. He exchanges his BrineCo stock for 10% of the R&W stock with a $100,000 fair market value and $50,000 cash.
What will be his realized gain?
Sam's realized gain will be $70,000. $20,000 of that gain will be deferred.
R&W proceeds with its acquisition of BrineCo. Sam acquired a 30% interest in BrineCo 15 years ago for $80,000. He exchanges his BrineCo stock for 10% of the R&W stock with a $100,000 fair market value and $50,000 cash.
What treatment will his recognized g
Sam's $50,000 recognized gain is a long-term capital gain, since it qualifies for sale or exchange treatment under � 302(b)(2).
Alejandra holds a debt instrument from Hibiscus Corporation. The debt's principal-value is $10,000, and its maturity date is December 31, 2014. In connection with the merger of Hibiscus and Tea Corporation, Alejandra exchanges her Hibiscus debt for a $10,
Even though these notes do not have a term remaining of more than five years, they qualify for tax free reorganization treatment because they have the same term.
Alejandra holds a debt instrument from Hibiscus Corporation. The debt's principal-value is $10,000, and its maturity date is December 31, 2014. In connection with the merger of Hibiscus and Tea Corporation, Alejandra exchanges her Hibiscus debt for a note
Alejandra recognizes a $5,000 capital gain on the exchange.
Target exchanges its assets with a $5 million fair market value and a $3 million basis for $4.5 million of Acquiring stock and $500,000 of land. Target does not distribute the land to its shareholders.
1) What is Target's gain on the reorganization?
2) Wh
Target recognizes a $500,000 gain on the reorganization (due to the other property not being distributed). Acquiring's basis in the assets received from Target is $3.5 million [$3,000,000 (Target's basis) + $500,000 (Target's gain recognized)].
Quinn exchanges all of his Target Corporation stock for Acquiring Corporation stock plus $3,000 cash. The exchange is pursuant to a tax free reorganization. Quinn paid $10,000 for the Target stock two years ago. The Acquiring stock received by Quinn has a
Quinn has a $5,000 realized gain, which is recognized to the extent of the boot received, $3,000. Quinn's basis in the Acquiring stock is $10,000. This can be computed as follows: $12,000 FMV of stock received less $2,000 postponed gain.
Quinn exchanges all of his Target Corporation stock for Acquiring Corporation stock plus $3,000 cash. The exchange is pursuant to a tax free reorganization. Quinn paid $16,000 for the Target stock two years ago. The Acquiring stock received by Quinn has a
Quinn's Target stock basis was $16,000. Quinn realizes a $1,000 loss on the exchange, and NONE OF IT is recognized.
His basis in the Acquiring stock is $13,000, computed as follows: $12,000 FMV of stock received plus $1,000 loss.
Acquiring Corporation obtains all the assets of Target Corporation, a French corporation, in exchange for 5,000 shares of Acquiring stock. Target is liquidated by distributing the Acquiring stock to its shareholders in exchange for their shares in Target.
This transaction qualifies as a "Type A" statutory merger.
Roca and Agua Corporations were united under state law into new R&W Corporation by transferring all of their assets to R&W in exchange for all of R&W's stock. By operation of state law, Roca and Agua liquidated by distributing R&W stock to their sharehold
This "Type A" reorganization is a consolidation.
R&W Corporation proceeds with the acquisition of AddCo. In the transaction between R&W and AddCo shareholders, 20% of R&W voting stock is exchanged for 90% of all classes of stock in AddCo.
What type of tax-free reorganization is this?
The exchange qualifies as a "Type B" reorganization. R&W becomes the parent of Addco.
Acquiring Corporation purchased 30% of Target's stock for cash six years ago. It acquires another 55% in the current year by exchanging its voting stock with Target's shareholders.
What type of tax-free reorganization is this?
Even though some of the Target shares were acquired with cash, the "Type B" requirements are satisfied through the current 55% exchange.
Acquiring Corporation purchased 30% of Target's stock for cash three months ago? It acquires another 55% in the current year by exchanging its voting stock with Target's shareholders.
What type of tax-free reorganization is this?
The acquisition of the additional 55% of Target's stock for voting stock seems to be part of a two-step transaction. The acquisition of the remaining stock for voting stock is probably not tax-free due to the step transaction doctrine.
R&W Corporation proceeds with the acquisition of ChemCo. R&W transfers voting stock representing a 30% ownership interest to ChemCo for substantially all of ChemCo's assets. After the exchange, ChemCo's only assets are cash and R&W voting stock. ChemCo di
The exchange qualifies as a "Type C reorganization if ChemCo liquidates after the distribution. The exchange is taxable to the shareholders to the extent of the cash they received.
Target Corporation exchanges $850,000 assets and a $250,000 liability for Acquiring stock worth $600,000. Target distributes the stock to its shareholders and liquidates.
What type of tax-free reorganization is this?
The transaction qualifies as a "Type C" reorganization. The liability is not treated as other property received. Acquiring obtained 100% of Target's assets for voting stock. The liability assumed by Acquiring is disregarded as boot in this situation.
Target Corporation exchanged its $850,000 assets and $250,000 liability for Acquiring stock worth $590,000 and $10,000 in cash. Target distributes the stock to its shareholders and liquidates.
What type of tax-free reorganization is this?
The liability now is considered other property because Target also received cash. Other property amounts to $260,000, which exceeds 20% of the fair market value of Target's assets ($850,000 x 20% =$170,000). This transaction would not qualify as a "Type C
Target Corporation exchanged its $850,000 assets for Acquiring voting stock worth $800,000 and $50,000. Target distributes the stock to its shareholders and liquidates.
What type of tax-free reorganization is this?
The transaction would qualify as a "Type C" reorganization. No liabilities are assumed, and the other property transferred is less than 20% of the fair market value of the assets ($50,000 < $170,000).
Acquiring Corporation purchased 30% of Target Corporation's stock five years ago. In the current year, the fair market value of Target's assets is $1 million. Acquiring transfers $700,000 of its voting stock to Target in exchange for the 70% of Target's a
This qualifies as a "Type C" reorganization. The previous purchase of Target stock is not considered to be part of the reorganization transaction. Therefore, Acquiring is exchanging solely voting stock for 100% control over Target's assets.
Acquiring Corporation wishes to control Target Corporation ($300,000 value), but Target holds a nontransferable license. Thus, Target must be the surviving corporation. Acquiring transfers all its assets valued at $700,000 to Target for 70% of Target's st
The transaction qualifies as a "Type D" reorganization
Bell is a manufacturing corporation. It also owns investment securities. Bell transfers the investment securities to a newly formed corporation and distributes the stock of the new corporation to its shareholders.
What type of tax-free reorganization is t
The transaction does not qualify as a "Type D" reorganization. Holding investment securities does not constitute a trade or business. The Bell shareholders are taxed on the stock they receive.
Jane and Ivan are the sole shareholders of WB Corporation. WB was organized 10 years ago and is actively engaged in manufacturing two products, widgets and bolts. Considerable friction has developed between Jane and Ivan, who now wish to divide the busine
The division of the business assets between the shareholders can be accomplished tax-free using one of the divisive "Type D" reorganizations.
Cube, Inc., has manufactured a single product at two plants for the past 10 years. It transfers one plant and related activities to a new corporation, Square, Inc. Cube then distributes the Square stock to its shareholders. Each plant's activities constit
The transaction qualifies as a "Type D" reorganization.
Shawnee purchased 10% (500 shares) of DistributingCo eight years ago for $60,000. Before the spin-off reorganization, DistributingCo's stock value was $900,000, and Shawnee's shares were valued at $90,000, or $180 per share ($90,000 500 shares).
Distribut
After the spin-off, the value of DistributingCo is reduced to $630,000, and therefore the value of Shawnee's stock in DistributingCo is $63,000. Shawnee's $60,000 beginning basis in DistributingCo is allocated to the two companies' stock as follows: $18,0
Shawnee purchased 10% (500 shares) of DistributingCo eight years ago for $60,000. Before the split-off reorganization, DistributingCo's stock value was $900,000, and Shawnee's shares were valued at $90,000, or $180 per share ($90,000 500 shares). Distribu
Shawnee is required to surrender 30% of her DistributirigCo stock (150 shares) to receive the 1,000 NewCo shares.
Shawnee purchased 10% (500 shares) of DistributingCo eight years ago for $60,000. Before the split-off reorganization, DistributingCo's stock value was $900,000, and Shawnee's shares were valued at $90,000, or $180 per share ($90,000 500 shares). Distribu
Shawnee's 350 DistributingCo shares (500 150) now have a value of $63,000($180 x 350), and her NewCo stock is worth $27,000($90,000 -$63,000). Shawnee's $60,000 beginning basis in DistributingCo is allocated to the two companies' stock as follows: $42,000
R&W Corporation proceeds with its acquisition of AddCo. Gail and Gary are equal shareholders of AddCo, which was organized six years ago. To prepare for the restructuring transaction with R&W, AddCo creates two new corporations to receive its business lin
This transaction qualifies as a "Type D" split-up. Neither Gary nor Gail recognizes any gain or Joss on the exchange. Gary and Gail take a basis in the AddCo stock equal to their basis in the stock of AbraseCo and MineCo.
All of Mesquite Corporation's bondholders exchange their $1,000, 3% interest-bearing bonds for $1,000, 4% interest-bearing bonds.
What type of tax-free reorganization is this?
This qualifies as a "Type E" reorganization because the surrendered bonds' face amount is equal to the face amount of the bonds received.
BrineCo's stock is owned 80% by Gomez Adams and 20% by his children. Gomez wants to relinquish his corporate control to his children. He exchanges his common voting stock for nonvoting preferred stock.
(1) What type of tax-free reorganization is this?
(2)
The exchange qualifies as a "Type E" reorganization. However, any difference in value between stock received and stock surrendered could be treated as compensation to Gomez or as a gift to Gomez's children.
Cedar Corporation exchanges each of its $1,000 bonds for 10 shares of common stock worth $100 per share.
What type of tax-free reorganization is this?
This qualifies as a "Type E" reorganization, and no gain is recognized because the bond value given up is equal to the stock value received ($1,000 =10 x $100).
Conifer Corporation changes its name to Evergreen Corporation.
What type of tax-free reorganization is this?
This is a "Type F" reorganization.
Orchard Corporation is organized as a Subchapter S corporation. Its shareholders wish to revoke its S election.
What type of tax-free reorganization is this?
Changing from an S corporation to a regular C corporation qualifies as a "Type F" reorganization.
Worthless Corporation files for Chapter 11 protection when its liabilities exceed its assets by $100,000 (cancellation-of-debt income relief). Worthless has a $60,000 NOL carryover and a $30,000 capital loss carryover at the time of its restructuring.
Wha
Through a "Type G" reorganization, NewStart, Inc., becomes the successor corporation to Worthless. NewStart must reduce the carryover attributes by $100,000. Consequently, NewStart has no NOL or capital loss carryovers from Worthless, and it must reduce t
What is the judicial doctrine behind the "business purpose" requirement?
Even if the statutory reorganization requirements are literally followed, a transaction will not be tax-free unless it exhibits a business purpose. The business purpose requirement is meant to limit nonrecognition treatment to transactions that are motiva
What is the judicial doctrine behind the "continuity of interest" requirement?
What threshold must be met?
The continuity of interest requirement prevents transactions that appear to be sales from qualifying as nontaxable reorganizations. Therefore, the continuity of interest test provides that if the shareholders have substantially the same investment after t
Target Corporation merges into Acquiring Corporation pursuant to state statutes. Under the merger plan, Target's shareholders can elect to receive either cash or stock in Acquiring. The shareholders who hold 45% of Target's outstanding stock elect to rece
This plan satisfies the continuity of interest test. The shareholders receiving cash are taxed on the transaction. Those receiving stock are not taxed.
Juanita owns 100% of Target Corporation. Target merges into Acquiring Corporation. Juanita receives 1% of Acquiring's outstanding stock in exchange for all of her Target stock.
Does this transaction satisfy the "continuity of interest" requirement?
The continuity of interest test is met; Juanita received only stock for her interest.
Juanita owns 100% of Target Corporation. Target merges into Acquiring Corporation. Juanita receives 1% of Acquiring's outstanding stock in exchange for all of her Target stock. Pursuant to a preexisting contract, Juanita sells all her Acquiring Corporatio
Since Ying is not considered a party related to Juanita, the sale to Ying does not affect the continuity of interest test.
What is the judicial doctrine behind the step up transaction requirement?
What can happen if "steps" are found to be too interdependent?
The step transaction doctrine prevents taxpayers from engaging in a series of transactions for the purpose of obtaining tax benefits that would not be allowed if the transaction was accomplished in a single step. When the steps are so interdependent that
R&W Corporation proceeds with its acquisition of ChemCo. Prior to the merger, ChemCo accumulated a $3 million NOL. After the reorganization, R&W generates $5 million of taxable income.
What are R&W's tax implications?
ChemCo's $3 million NOL carries over to offset the $5 million taxable income, reducing it to $2 million. R&W saves $1,020,000 in Federal income taxes by being able to utilize ChemCo's NOL carryover ($3 million NOL carryover x 34%). Thus, the $3 million NO
Target Corporation is merged into Acquiring Corporation in a "Type A" reorganization. At the time of the merger, Target had an NOL of $100,000. Pursuant to the merger, Target's shareholders, none of whom own a 5% interest, receive 40% of Acquiring's stock
An equity structure shift has taken place. Since all of Target's shareholders owned less than 5%, they are aggregated in determining the owner shift. As a group, these shareholders owned 100% of the loss corporation prior to the restructuring and onIy 40%
Winner Corporation acquires Loser Corporation when Loser has a $250,000 NOL carryforward. Winner exchanges 30% of its stock valued at $600,000 for all of Loser's stock. The applicable long-term tax-exempt rate at the change date is 5%. Several months befo
The �382 limitation computation will not include the recent increase in Loser's fair market value. Consequently, the yearly �382 limitation is $25,000 ($500,000 x 5%).
Makinglt Corporation acquires WashedUp Corporation in a transaction that subjects WashedUp's $600,000 NOL to a $40,000 per year � 382 limitation. After the acquisition, there are 15 years remaining for deducting the NOL. Given that Makinglt uses a discoun
Thus, Makinglt should not pay WashedUp more than $106,484 for the $210,000 NOL tax benefits ($600,000 NOL x 35% tax rate). This means that because of the time value of money, the NOL is worth about half of its face value!
The present value of the NOL is c
Makinglt Corporation acquires WashedUp Corporation in a transaction that subjects WashedUp's $600,000 NOL to a $120,000 per year �382 limitation. After the acquisition, MakingIt can deduct the NOL within 5 years. Given that Makinglt uses a discount factor
The NOL can be fully deducted in 5 years. Using a 10% discount factor the value of the NOL benefit to Makinglt increases to $159,222, computed as follows:
$120,000 x 35% tax rate $42,000 tax saving per year x 3.791 (discount factor
for present value of an
Profit Corporation acquires Loss Corporation and its $300,000 NOL in a transaction causing an equity structure shift. Loss's value on the change date is $500,000, and the applicable long-term tax-exempt rate is 5%. Therefore, the yearly �382 limitation is
The successor corporation may offset its taxable income by $20,000 of the NOL. Since the �382 limit is $25,000, the NOL limit for next year will be $30,000 ($25,000 current + $5,000 prior-year carryover) rather than $25,000.
On December 1, Minus transfers all of its assets to Plus (a calendar year corporation) in exchange for 40% of Plus's stock. At the time of the merger, Minus is valued at $900,000 and has an NOL carryover of $200,000. The long-term tax exempt rate is 5%.
W
Since a more than 50-percentage-point ownership change has occurred for Minus's shareholders, the amount of NOL available for use in the merger year is $3,699 [$900,000 x 5% = $45,000 x (30/365)). The NOL available to reduce the successor corporation's ta
Target Corporation is merged into Acquiring Corporation on December 31, 2011. On that date, the E&P balance for Target is a negative $75,000, and for Acquiring it is a positive $400,000. In 2012, current E&P for Acquiring is $50,000.
What are Acquiring's
Acquiring now has two E&P balances:
pre-2012 $400,000 and post-2011 negative $25,000 ($50,000 -$75,000).
Gaming Corporation distributes its computer gaming line of business to the newly created Compgame in a transaction qualifying as a "Type D" spin-off reorganization. Before the distribution, Gaming is worth $1 million and holds E&P of $300,000. After the s
Compgame starts with an E&P balance of $120,000 ($300,000 x $400,000 / $1,000,000), and Gaming retains an E&P balance of $180,000 ($300,000 -$120,000).
R&W Corporation proceeds with the acquisition of ChemCo, and it acquires $100,000 of general business credits from ChemCo. Assume that the � 382 limitation for the year is $200,000 and that R&W's taxable income is $800,000 before applying this limitation.
The amount of general business credit that R&W may take in the current year is $68,000, computed as follows:
Step 1. Regular tax liability ($800,000 x 34% tax rate) = $272,000
Step 2. Tax liability with full �382 limitation ($600,000 x 34% tax rate) = $20
Two years ago, Gain Corporation acquired Loss Corporation in a transaction causing an ownership change. The �382 limitation is $150,000 for the current year. Gain Corporation's taxable income before considering carryovers is $400,000 ordinary income and $
The capital loss is utilized first to offset the capital gain, and then the NOL is used against the ordinary income. Taxable income becomes $420,000 [($100,000 -$20,000) + ($400,000 - $60,000)]. If the full �382 limitation were utilized. taxable income wo
Cardinal Corporation, worth $200,000, has a $150,000 NOL. The stock in Cardinal is owned by Kevin, 55%, and Fran, 45%. Kevin wants to sell his interest in Cardinal and retire.
But what happens to the NOL if Kevin sells his entire interest?
There would be a more than 50 percentage-point change in the ownership of Cardinal Corporation.
Therefore, the �382 limitation would be $200,000 times the long term tax-exempt rate. Assume the rate is 10%. The loss of $150,000 is now limited to $20,000 an
Cardinal Corporation, worth $200,000, has a $150,000 NOL. The stock in Cardinal is owned by Kevin, 55%, and Fran, 45%. Kevin wants to sell his interest in Cardinal and retire.
Can a sale be structured so that the NOL is not so limited?
An owner shift is calculated for the three-year testing period. Kevin could sell 35% of Cardinal stock in Year 1, 5% in Year 2, 5% in Year 3, and 10% in Year 4. None of the three-year testing periods has a more than 50-percentage-point change in the owner
Abby, an individual in the 35% tax bracket, acquired stock in Quail Corporation four years ago for $300,000. In the current year, Quail Corporation (E & P of $1 million) redeems her shares for $450,000. Assume the redemption qualifies for for sale or exch
(1) If the redemption qualifies for sale or exchange treatment, Abby will have a long-term capital gain of $150,000.
L-T Tax Liability Calculation:
$450,000 (redemption amount) less $300,000 (basis).
(2) Her tax liability on the $150,000 gain will be $22,
Abby, an individual in the 35% tax bracket, acquired stock in Quail Corporation four years ago for $300,000. In the current year, Quail Corporation (E & P of $1 million) redeems her shares for $450,000. Assume the redemption does not qualify for for sale
(1) If the stock redemption does not qualify as a sale or exchange, the entire distribution will be treated as a dividend. Abby's long-term capital gain will be $0.
(2) Abby's tax liability will be $67,500.
Calculation of Tax Liability:
$450,000 (redempti
Abby, an individual in the 35% tax bracket, acquired stock in Quail Corporation four years ago for $300,000. In the current year, Quail Corporation (E & P of $1 million) redeems her shares for $450,000. Abby has a capital loss carryover of $100,000 in the
If the transaction does not qualify for sale or exchange treatment, the entire $450,000 will be taxed as a dividend at 15%.
In addition, assuming she has no capital gains in the current year, Abby will be able to deduct only $3,000 of the $100,000 capital
Abby, an individual in the 35% tax bracket, acquired stock in Quail Corporation four years ago for $300,000. In the current year, Quail Corporation (E & P of $1 million) redeems her shares for $450,000. Abby has a capital loss carryover of $100,000 in the
If the transaction is a qualifying stock redemption, Abby can offset the entire $100,000 capital loss carryover against her $150,000 long-term capital gain.
(1) As a result, only $50,000 of the gain will be taxed.
(2) Her tax liability will be only $7,500
Abby is a corporation. Abby acquired stock in Quail Corporation four years ago for $300,000. The stock represents a 40% ownership
interest in Quail Corporation. In the current year, Quail Corporation (E & P of $1 million) redeems Abby's shares for $450,00
Abby will have a long-term capital gain of $150,000 that will be subject to tax at 34%, or $51,000.
Abby is a corporation. Abby acquired stock in Quail Corporation four years ago for $300,000. The stock represents a 40% ownership
interest in Quail Corporation. In the current year, Quail Corporation (E & P of $1 million) redeems Abby's shares for $450,00
The $450,000 distribution is treated as a dividend, since Abby's redemption does not qualify for sale or exchange treatment.
However, Abby will have a dividends received deduction of $360,000 ($450,000 x 80%), so only $90,000 of the payment will be taxed.
Christina Flores formed Orange Corporation 15 years ago, and she owns 80% all 10,000 shares of Orange stock outstanding (basis of $400,000). Christina's two children, ages 24 and 22 own the rest of the 20% stock. The children have worked full-time with Or
For purposes of the stock attribution rules (�318), Christina is treated as owning 100% of the stock in Orange Corporation. She owns 80% directly and, because of the family attribution rules, 20% indirectly through her children.
An individual is deemed to
Chris owns 40% of the stock in Gray Corporation. The other 60% is owned by a partnership in which Chris has a 20% interest.
Under � 318 of the IRC, how much stock does Chris constructively own?
Chris is deemed to own 52% of Gray Corporation: 40% directly and, because of the partnership interest, 12% indirectly (20% x 60%).
A partner is deemed to own the stock owned by a partnership to the extent of the partner's proportionate interest in the par
Pat owns 58% of the common stock of Falcon Corporation. As a result of a redemption of some of his stock, Pat's ownership interest in Falcon is reduced to 51 %.
How will the stock redemption qualify for Pat?
Since Pat continues to have dominant voting rights in Falcon after the redemption, the distribution is treated as essentially equivalent to a dividend. The entire amount of the distribution therefore is taxed as dividend income (assuming adequate E&P).
Maroon Corporation redeems 2% of its stock from Maria. Before the redemption, Maria owned 10% of Maroon Corporation.
How will the stock redemption qualify for Maria?
In this case, the redemption may qualify as a not essentially equivalent redemption. Maria experiences a reduction in her voting rights, her right to participate in current earnings and accumulated surplus, and her right to share in net assets upon liquid
Floyd and Fran, husband and wife, each own 50 shares in Grouse Corporation, representing 100% of the corporation's stock. All the stock was purchased for $50,000. Both Floyd and Fran serve as directors of the corporation. The corporation redeems Floyd's 5
The redemption is treated as a dividend distribution (assuming adequate E & P) because Floyd constructively owns Fran's stock, or 100% of the Grouse stock outstanding. Floyd and Fran's basis in each of the 50 stocks prior to the distribution is $25,000. F
Bob, Carl, and Dan, unrelated individuals, own 30 shares, 30 shares, and 40 shares, respectively, in Wren Corporation. Wren has 100 shares outstanding and E & P of $200,000. The corporation redeems 20 shares of Dan's stock for $30,000. Dan paid $200 a sha
Dan's ownership in Wren Corporation before and after the redemption is as follows:
Before Redemption:
Total Shares: 100
Dan's Ownership: 40
Ownership %: 40%
80% Original Ownership: 32%
After Redemption:
Total Shares: 80
Dan's Ownership: 20
Ownership %: 25
Bob, Carl, and Dan, unrelated individuals, own 30 shares, 30 shares, and 40 shares, respectively, in Wren Corporation. Wren has 100 shares outstanding and E & P of $200,000. The corporation redeems 20 shares of Dan's stock for $30,000. Dan paid $200 a sha
Dan's 25% ownership after the redemption meets both tests of � 302(b)(2):
(1) It is less than 80% of his original ownership and less than 50% of the total voting power.
(2) The distribution therefore qualifies as a disproportionate redemption and receives
Bob, Carl, and Dan, unrelated individuals, own 30 shares, 30 shares, and 40 shares, respectively, in Wren Corporation. Wren has 100 shares outstanding and E & P of $200,000. The corporation redeems 20 shares of Dan's stock for $30,000. Dan paid $200 a sha
Dan's ownership in Wren Corporation before and after the redemption is as follows:
Before Redemption:
Total Shares: 100
Dan's Ownership (constructive): 70
Ownership %: 70%
80% Original Ownership: 56%
After Redemption:
Total Shares: 80
Dan's Ownership: 50
Bob, Carl, and Dan, unrelated individuals, own 30 shares, 30 shares, and 40 shares, respectively, in Wren Corporation. Wren has 100 shares outstanding and E & P of $200,000. The corporation redeems 20 shares of Dan's stock for $30,000. Dan paid $200 a sha
The redemption described above would not qualify for sale or exchange treatment because of the effect of the attribution rules.
Dan's direct and indirect ownership of 62.5% fails to meet either of the tests of �302(b)(2).
After the redemption, Dan owns mo
Bob, Carl, and Dan, unrelated individuals, own 30 shares, 30 shares, and 40 shares, respectively, in Wren Corporation. Wren has 100 shares outstanding and E & P of $200,000. The corporation redeems 20 shares of Dan's stock for $30,000. Dan paid $200 a sha
The basis in the 20 shares redeemed is added to Dan's basis in his remaining 20 shares. Therefore, Dan's Basis in his remaining stock is $8,000:
$200 x 20 (basis in stock remaining) +
$200 x 20 (basis in stock redeemed).
Kevin owns 50% of the stock in Green Corporation, while the remaining interest in Green is held as follows: 40% by Wilma (Kevin's wife) and 10% by Carmen (a key employee). Green redeems all of Kevin's stock for its fair market value. As a result, Wilma an
If the requirements for the family attribution waiver are met, the transaction will qualify as a complete termination redemption and result in sale or exchange treatment.
Kevin treats the transaction as a sale or exchange.
Kevin owns 50% of the stock in Green Corporation, while the remaining interest in Green is held as follows: 40% by Wilma (Kevin's wife) and 10% by Carmen (a key employee). Green redeems all of Kevin's stock for its fair market value. As a result, Wilma an
The waiver requirements are not satisfied, Kevin will be deemed to own Wilma's (his wife's) stock, and the entire distribution will be taxed as a dividend (assuming adequate E&P).
Kevin owns 50% of the stock in Green Corporation, while the remaining interest in Green is held as follows: 40% by Wilma (Kevin's wife) and 10% by Carmen (a key employee). Green redeems all of Kevin's stock for its fair market value. As a result, Wilma an
Kevin has acquired a prohibited interest, and the redemption distribution is reclassified as a dividend. Kevin will owe additional taxes due to this revised treatment.
Dove Corporation owned a building with seven floors. Part of the building was rented, and part was used directly in Dove's business. A fire destroyed the two top floors, and Dove received insurance proceeds in reimbursement for the damage sustained. For b
The distribution is not essentially equivalent to a dividend and qualifies as a partial liquidation.
Assume that Orange Corporation loses a major customer and a severe drop in sales occurs. The corporation reduces its inventory investment and has $600,000 of excess cash on hand as a result. It distributes the excess cash to Christina in redemption of 10%
The redemption does not qualify as a not essentially equivalent redemption, a disproportionate redemption, or a complete termination redemption. The IRS has ruled that neither the sale of investments nor the sale of excess inventory will satisfy the genui
Loon Corporation, the owner and operator of a wholesale grocery business with a substantial amount of excess cash, purchased a freight hauling concern. Six years later, Loon distributes the freight-hauling assets in kind on a pro-rata basis to its shareho
The distribution satisfies the termination of a business test. Loon had conducted both businesses for at least five years and continues to conduct the wholesale grocery business. Thus, for non-corporate shareholders, the distribution qualifies as a partia
Juan's adjusted gross estate is $7 million. The death taxes and funeral and administration expenses of the estate total $720,000. Included in the gross estate is stock of Yellow Corporation valued at $2.8 million. Juan had acquired the stock nine years ag
Because the value of the Yellow stock in Juan's estate exceeds the 35% threshold ($2.8 million -; $7 million = 40%), the redemption qualifies under �303 as a sale or exchange to Juan's estate. Assuming the value of the stock has remained unchanged since t
The adjusted gross estate of a decedent is $8 million. The gross estate includes stock of Owl and Robin Corporations valued at $1.6 million and $1.4 million, respectively.
Can a redemption qualify as a sale or exchange to the decedent's estate?
Under what
Unless the two corporations are treated as a single corporation for purposes of the 35% test, �303 does not apply to a redemption of the stock of either corporation.
If the decedent owned at least 20% of the stock of both Owl and Robin, �303 can apply to
To carry out a stock redemption, Blackbird Corporation distributes land (basis of $80,000, fair market value of $300,000) to a shareholder.
What is Blackbird's recognized gain?
Blackbird has a recognized gain of $220,000 ($300,000 $80,000).
To carry out a stock redemption, Blackbird Corporation distributes land (basis of $80,000, fair market value of $300,000) to a shareholder. The land is subject to a liability of $330,000.
What is Blackbird's recognized gain?
If the land is subject to a liability of $330,000, Blackbird has a recognized gain of $250,000 ($330,000 - $80,000).
If the value of the property distributed was less than its adjusted basis, the realized loss would not be recognized.
Navy Corporation has 100 shares of stock outstanding. In a qualifying stock redemption, Navy distributes $200,000 in exchange for 30 of its shares. At the time of the redemption, Navy has paid-in capital of $120,000 and E&P of $450,000.
What is Navy's div
The charge to E&P is limited to 30% of the corporation's E&P ($135,000), and the remainder of the redemption price ($65,000) is a reduction of the Navy paid-in capital account.
Navy Corporation has 100 shares of stock outstanding. In a qualifying stock redemption, Navy distributes $80,000 in exchange for 30 of its shares. At the time of the redemption, Navy has paid-in capital of $120,000 and E&P of $450,000.
(1) What is Navy's
The charge to E&P is limited to 30% of the corporation's E&P ($135,000). However, the 30 shares were redeemed for $80,000, so the charge to E&P would be limited to $80,000, the amount paid by the corporation to carry out the stock redemption. $0 of this d
Assume that on January 3 of the current year, Orange Corporation (E&P of $2 million) declares and issues a nontaxable preferred stock dividend of 1,000 shares to Christina.
After the stock dividend, the fair market value of one share of common is $540, an
Section 306 produces the following results:
(1) After the distribution and before the sale, the preferred stock has a basis to Christina of $40,000 [($600,000 value of preferred � $6 million value of preferred
and common) x $400,000 (original basis of com
Goose Corporation, with E & P of $40,000, makes a cash distribution of $50,000 to its sole shareholder. The shareholder's basis in the Goose stock is $20,000. The distribution is not a qualifying stock redemption or satisfies the complete liquidation requ
If the distribution is not a qualifying stock redemption or in complete liquidation, the shareholder recognizes dividend income of $40,000 (the amount of Goose's E & P) and treats the remaining $10,000 of the distribution as a return of capital.
Goose Corporation, with E & P of $40,000, makes a cash distribution of $50,000 to its sole shareholder. The shareholder's basis in the Goose stock is $20,000. The distribution is a qualifying stock redemption or satisfies the complete liquidation requirem
If the distribution is a qualifying stock redemption or is pursuant to a complete liquidation, the shareholder has a capital gain of $30,000 ($50,000 distribution - $20,000 stock basis).
In the case of these distributions, Goose's E&P is of no consequence
The stock of Tern Corporation is owned equally by three brothers, Rex, Sam, and Ted. When Ted's basis in his stock is $40,000, the corporation distributes $30,000 to him in cancellation of all his shares. The distribution is a qualifying stock redemption
If the distribution is a qualifying stock redemption, the $10,000 realized loss is not recognized because Ted and Tern Corporation are related parties. Under �267, Ted is deemed to own more than 50% in value of the corporation's outstanding stock. Ted's d
The stock of Tern Corporation is owned equally by three brothers, Rex, Sam, and Ted. When Ted's basis in his stock is $40,000, the corporation distributes $30,000 to him in cancellation of all his shares. The distribution is a qualifying stock redemption
Since the distribution is pursuant to a complete liquidation, Ted's $10,000 realized loss is recognized despite his �267 related party association.
Pursuant to a complete liquidation, Warbler Corporation distributes to its shareholders-land held as an investment (basis of $200,000, fair market value of $300,000).
What is Warbler's gain on the distribution?
If no liability is involved, Warbler has a gain of $100,000 on the distribution ($300,000 - $200,000).
Pursuant to a complete liquidation, Warbler Corporation distributes to its shareholders-land held as an investment (basis of $200,000, fair market value of $300,000). The land is subject to a liability of $250,000.
What is Warbler's gain on the distributi
Warbler Corporation has a gain of $100,000 on the distribution ($300,000 - $200,000).
Pursuant to a complete liquidation, Warbler Corporation distributes to its shareholders-land held as an investment (basis of $200,000, fair market value of $300,000). The land is subject to a liability of $350,000.
What is Warbler's gain on the distributi
Warbler's gain on the distribution would be $150,000 ($350,000 - $200,000).
Christina Flores formed Orange Corporation 15 years ago, and she owns all 10,000 shares of Orange stock outstanding (basis of $400,000). Christina's two children, ages 24 and 22 have worked full-time with Orange over the last two years and have demonstrat
Absent any exceptions to the contrary, the general rule of carryover basis would apply, and Orange would take a carryover basis of $100,000 in the property while Christina would take a $100,000 basis in the additional stock. A sale or liquidating distribu
Bluebird Corporation stock is owned by Ana and Sanjay, who are unrelated. Ana owns 80% and Sanjay owns 20% of the stock in the corporation. Bluebird has the following assets (none of which were acquired in a �351 or contribution to capital transaction) th
Bluebird recognizes a gain of $50,000 on the distribution of the equipment. The loss of $200,000 on the building is disallowed because the property is distributed to a related party and the distribution is not pro rata (i.e., the building is not distribut
Bluebird Corporation stock is owned by Ana and Sanjay, who are unrelated. Ana owns 80% and Sanjay owns 20% of the stock in the corporation. Bluebird has the following assets (none of which were acquired in a �351 or contribution to capital transaction) th
Bluebird recognizes the $50,000 gain on the equipment. However, it also recognizes the $200,000 loss on the building because the property is not distributed to a related party (i.e., Sanjay does not own more than 50% of the stock in Bluebird Corporation).
Wren Corporation's stock is held equally by three brothers. Four years before Wren's-liquidation, the shareholders transfer jointly owned property (basis of $150,000, fair market value of $200,000) to the corporation in return for stock in a �351 transact
Section 267 provides the definition of a related parly for purposes of this provision. The rules are similar to the stock attribution rules with one exception: a sibling is treated as owned by the taxpayer under � 267.
Because each brother owns directly a
Wren Corporation's stock is held equally by three brothers. Four years before Wren's-liquidation, the shareholders transfer jointly owned property (basis of $150,000, fair market value of $100,000) to the corporation in return for stock in a �351 transact
As a result of the � 362(e)(2) basis step-down rules, Wren Corporation's basis in the property is $100,000 [$150,000 (basis to brothers) -$50,000 (net built-in loss of property transferred)].
ln a liquidating distribution of the property to the brothers,
On January 4,2011, Brown Corporation acquires two properties from a shareholder in a transaction that qualifies under � 351.
S-H Basis; FMV; Built-in Gain/Loss
Land: $100,000; $50,000; ($50,000) Securities: $10,000; 35,000; 25,000
Net Loss: ($25,000)
What
The net built-in loss of $25,000 results in a stepped-down basis of $75,000 in the land for Brown Corporation [$100,000 (shareholder's basis) - $25,000 (step-down equal to net built-in loss)].
On January 4,2011, Brown Corporation acquires two properties from a shareholder in a transaction that qualifies under � 351.
S-H Basis; FMV; Built-in Gain/Loss
Land: $100,000; $50,000; ($50,000) Securities: $10,000; 35,000; 25,000
Net Loss: ($25,000)
Brow
Of the $45,000 loss realized [$30,000 (value of land on date of distribution) $75,000 (basis in land)] by Brown on the distribution, $25,000 is disallowed by the built-in loss limitation [$50,000 (value of land when acquired by Brown) - $75,000 (stepped d
Cardinal Corporation's stock is held by two unrelated individuals: 60% by Manuel and 40% by Jack. One year before Cardinal's liquidation, Manuel transfers land (basis of $150,000, fair market value of $100,000) and equipment (basis of $10,000, fair market
As there is no net built-in loss on the transfer, Cardinal will have a basis of $150,000 in the land.
Cardinal Corporation's stock is held by two unrelated individuals: 60% by Manuel and 40% by Jack. One year before Cardinal's liquidation, Manuel transfers land (basis of $150,000, fair market value of $100,000) and equipment (basis of $10,000, fair market
Even though the distribution is to an unrelated party, the built in loss of $50,000 is not recognized. However, Cardinal Corporation can recognize the loss of $10,000 ($90,000 -$100,000) that occurred while it held the land.
Cardinal Corporation's stock is held by two unrelated individuals: 60% by Manuel and 40% by Jack. One year before Cardinal's liquidation, Manuel transfers land (basis of $150,000, fair market value of $100,000) and equipment (basis of $10,000, fair market
Since the land is distributed to Manuel, a related party who owns more than 50% of Cardinal, the entire $60,000 loss is disallowed under the related-party loss limitation.
Cardinal Corporation's stock is held by two unrelated individuals: 60% by Manuel and 40% by Jack. One year before Cardinal's liquidation, Manuel transfers land (basis of $150,000, fair market value of $100,000) and equipment (basis of $10,000, fair market
Because there is a business purpose for the transfer, all of the $60,000 loss is recognized if the land is distributed to Jack in liquidation.
Cardinal Corporation's stock is held by two unrelated individuals: 60% by Manuel and 40% by Jack. One year before Cardinal's liquidation, Manuel transfers land (basis of $150,000, fair market value of $100,000) and equipment (basis of $10,000, fair market
Since Manuel is a related party (he owns more than 50% of the stock), the entire loss is still disallowed under the related-party loss limitation.
Purple Corporation's assets are valued at $2 million after payment of all corporate debts except for $300,000 of taxes payable on net gains it recognized on the liquidation.
What is Purple's shareholders realized gain after liquidation?
The amount realized by the shareholders is $1.7 million ($2,000,000 - $300,000). In determining the gain or loss recognized by a shareholder, the amount realized is offset by the stock's adjusted basis.
After a plan of complete liquidation has been adopted, Beige Corporation sells its only asset, unimproved land held as an investment. The land has appreciated in value and is sold to Jane (an unrelated party) for $100,000. Under the terms of the sale, Bei
Pursuant to �331(a) Liquidations�Effect on the Shareholder > Installment Obligations:
(1) Beige Corporation recognizes gain on the distribution of the installment notes, measured by the difference between the $75,000 fair market value and the basis Beige
The stock of Tan Corporation is held as follows: 80% by Mustard Corporation and 20% by Arethia. Tan Corporation is liquidated on December 9, 2011, pursuant to a plan adopted on January 7, 2011. At the time of its liquidation, Tan Corporation has assets wi
In a � 332 parent-subsidiary liquidation, up to 20 percent of the subsidiary's stock can be owned by minority shareholders. In such liquidations, a distribution of property to a minority shareholder is treated in the same manner as a non-liquidating distr
Eagle Corporation owes its parent, Finch Corporation, $20,000. It satisfies the obligation-by transferring land (basis of $8,000, fair market value of $20,000) to Finch.
How much gain does Eagle recognize?
Normally, Eagle would recognize a gain of $12,000 on the transaction. However, if the transfer is made pursuant to a liquidation under �332, Eagle does not recognize a gain.
Pelican Corporation owns bonds (basis of $95,000) of its subsidiary, Crow Corporation, that were acquired at a discount. Upon liquidation of Crow pursuant to �332, Pelican receives a distribution of $100,000, the face amount of the bonds.
How much gain do
The transaction has no tax effect on Crow. However, Pelican Corporation recognizes gain of $5,000 [$100,000 (amount realized) $95,000 (basis in bonds)].
Lark Corporation has a basis of $200,000 in the stock of Heron Corporation, a subsidiary in which it owns 85% of all classes of stock. Lark purchased the Heron stock 10 years ago. In the current year, Lark liquidates Heron Corporation and acquires assets
Lark Corporation takes a basis of $500,000 in the assets, with a potential gain upon their sale of $300,000. Lark's $200,000 basis in Heron's stock disappears.
Indigo Corporation has a basis of $600,000 in the stock of Kackie Corporation, a wholly-owned subsidiary acquired 10 years ago. It liquidates Kackie Corporation and receives assets that are worth $400,000 and have a tax basis to Kackie of $300,000.
(1) Wh
Indigo Corporation takes a basis of $300,000 in the assets it acquires from Kackie. If Indigo sells the assets, it has a gain of $100,000 even though its basis in the Kackie stock was $600,000. Indigo's loss on its stock investment in Kackie will never be