9.4 - Corporate Tax Special Topics - Redemptions

Question 1

Redemptions - Overview

When is a stock considered to be redeemed?

Answer 1

When a corporation acquires its own stock from a shareholder in exchange for property, regardless of redeemed stock being canceled, retired, or held as treasury stock

Question 2

Redemptions - Overview

How are shareholders required to treat amounts realized on a redemption not in liquidation?

Answer 2

Either as a distribution (a corporate dividend) or as a sale of stock redeemed.

Question 3

Redemptions - Dividend or Sale Treatment

How are redemptions of stock by a corporation treated?

Answer 3

As dividends unless certain conditions are met

Question 4

Redemptions - Dividend or Sale Treatment

Identify the (5) conditions that must be met for the exchange of stock to be treated as a sale and the gains or losses are capital gains and losses.

Answer 4

1 – Redemption is not essentially equivalent to a dividend;

2 – redemption is substantially disproportionate;

3 – distribution is in complete redemption of all of a shareholder’s stock;

4 – distribution is to a noncorporate shareholder in partial liquidation;

5 – distribution is rec’d by an estate

Question 5

Redemptions - Realized Gain

How does a corporation recognize gain realized on a distribution?

Answer 5

As if the property distributed were sold at FMV to the distributee immediately prior to the distribution and even if stock is redeemed by the distribution

Question 6

Redemptions - Loss Recognition

Complete the statement >>> No recognition of loss realized is allowed by the corporation, unless the redemption is…

Answer 6

In complete liquidation of the corporation or of stock held by an estate (to pay death taxes)

Question 7

Redemptions - Recognition of Depreciated Property Distribution

How does a corporation recognize ordinary income on the distribution of depreciated property?

Answer 7

To the extent of depreciation or amount realized, whichever is less.

Question 8

Redemptions - Shareholder Treatment

How is any unrecovered basis in the redeemed stock treated?

Answer 8

It is added to the shareholder’s basis in stock retained

Question 9

Redemptions - Stock Reaquisition

Are the expenses incurred in connection with a reacquisition by a corporation of its own stock or the stock of a related person (50% relationship test) deductible?

Answer 9

No

Question 10

Redemptions - Stock Reaquisition

Identify the exception to reacquisition expenses being deductible?

Answer 10

Any cost allocable to an indebtedness and amortized over the life of the indebtedness (e.g. financial advisory costs)

Question 11

Redemptions - Sale Treatment

How do shareholders treat qualifying redemptions?

Answer 11

As if the shares redeemed were sold to a third party

Question 12

Redemptions - Sale Treatment

What is the gain or loss for the sale treatment of redemptions?

Answer 12

Any spread between AB of the shares and the FMV of property rec’d

Question 13

Redemptions - Sale Treatment

What is the nature of the stock in the shareholder’s hands dependent on?

Answer 13

The character of gain or loss of the stock

Question 14

Redemptions - Sale Treatment

What is basis in distributed property?

Answer 14

FMV

Question 15

Redemptions - Sale Treatment

When does the holding period start for redeemed property?

Answer 15

Starts the day after the redemption exchange

Question 16

Redemptions - Sale Treatment

Identify the 5 requirements applicable to the sale treatment of redemptions.

Answer 16

1 – Terminate a shareholder’s interest;

2 – are substantially disproportionate between shareholders;

3 – are not essentially equivalent to a dividend;

4 – are rec’d by an estate;

5 – are from a shareholder, other than a corporation, in partial liquidation

Question 17

Redemptions - Sale Treatment

How is treatment of a redemption as a sale determined for each shareholder?

Answer 17

Separately

Question 18

Redemptions - Termination of Interest

True or False >>> Termination of a shareholder’s interest must be complete to qualify.

Answer 18

True

Question 19

Redemptions - Termination of Interest

True or False >>> All the corporation’s stock owned by the shareholder must be redeemed in the exchange for the property?

Answer 19

True

Question 20

Redemptions - Termination of Interest

Family attribution rules apply but may be waived if the following 3 requirements are met:

Answer 20

1 – the shareholder may not retain any interest, except as a creditor, in the corporation;

2 – the shareholder may not acquire any interest, except by bequest or inheritance, for 10 years;

3 – a written agreement must be filed with the IRS stating that the IRS will be notified if a prohibited interest is acquired.

Question 21

Redemptions - Substantially Disproportionate

Define substantially disproportionate.

Answer 21

Means that the amount rec’d by shareholders is not in the same proportion as their stock holdings

Question 22

Redemptions - Substantially Disproportionate

How is being substantially disproportionate determined?

Answer 22

By determining the shareholders’ applicable ownership percentages (including constructive ownership) both before and after redemption

Question 23

Redemptions - Substantially Disproportionate

When is a redemption considered substantially disproportionate?

Answer 23

If immediately after the redemption, the shareholder owns less than 50% of the voting power of outstanding stock and less than 80% each of the interest in the voting stock owned before the redemption and common stock owned before the redemption

Question 24

Redemptions - Equivalency to a Dividend

What does “not essentially equivalent to a dividend” mean?

Answer 24

There is a meaningful reduction in the shareholder’s proportionate interest in the corporation; reduction in voting power is generally required

Question 25

Redemptions - Estate

True or False >>> an estate may treat a qualifying redemption (to pay death taxes) as a sale.

Answer 25

True

Question 26

Redemptions - Estate

How must qualifying redeemed stock be valued when treated a sale?

Answer 26

Must be valued at more than 35% of the gross estate net of deductions allowed

Question 27

Redemptions - Estate

What deductions are allowed when an estate has qualifying redemptions treated as sales?

Answer 27

• Administrative expenses;
• funeral expenses;
• claims against the estate (including death taxes), and
• unpaid mortgages

Question 28

Redemptions - Partial Liquidations

Are partial liquidations a type of redemption?

Answer 28

Yes

Question 29

True or False >>> the (redeemed) shareholder is treated as owning shares owned by certain related parties, e.g. family members (excluding siblings and grandparents).

Answer 29

True