Ch 4 Part 2

Question 0

Attribution from entities 2

Answer 0

Stock owned by or for partnership is considered to be owned
Proportionately by partners

Stock owned by or for an estate is considered to be owned
Proportionately by the beneficiaries

Question 1

Family Attribution section 318, two things

Answer 1

Individual is considered to own constructively all stock owned by
Or for his or her spouse, children, grandchildren and parents

An individual isn’t considered to own stock owned by his brothers,
Sisters or grandparents

Question 2

Attribution to entities 4

Answer 2

1 All stock owned by or for a partnership is considered to be
Constructively owned by the partnership
2 All stock owned by or for beneficiary of estate or trust is
considered to be constructively owned by estate or trust
3 all stock owned by or for shareholder who owns (directly
Or indirectly) 50% more C corporation’s stock is considered
Constructively owned by corporation
4 stock ownership attributed to partnership, estate, trust or
Corporation from a partner, beneficiary or shareholder is not
Reattributed to another partner, beneficiary or shareholder

Question 3

Option attribution

Answer 3

Person who holds an option to purchase stock is considered

To own the underlying stock

Question 4

A redemption is substantially disproportionate with respect to a shareholder if all 3 conditions are met after redemption:

Answer 4

1 shareholder owns less than 50% of total Combined voting
power of all classes of voting stock
2 shareholder owns less than 80% of his or her percentage
Ownership of voting stock that they owned before the redemption
3 shareholder owns less than 80% common stock that they owned
Before the redemption

Question 5

What 3 conditions must the shareholder meet to have the family attribution rules waived

Answer 5

1 after redemption shareholder must not retain any interest
In corp. except as creditor (restriction includes interest as employee)
2 shareholder must not acquire any such interest (other than
By bequest or inheritance) for at least 10 years after date of
redemption
3 shareholder must file written agreement with IRS that he or
She will notify IRS upon acquiring any prohibited interest

Question 6

Redemption of a non corporate shareholder’s stock qualifies for sale treatment if…

Answer 6

The redemption is in partial liquidation of the corporation

Question 7

Partial liquidation

Answer 7

Occurs when corporation discontinues one line of business,
Distributes assets used in that business to its shareholders

And continues at least one other line of business

Question 8

When must a partial distribution be made to get sales tax treatment

Answer 8

Distribution Must be made within the tax year in which the
Plan of partial liquidation has been adopted

or within succeeding tax year

Question 9

Safe Harbor Rule Sec. 302 e: distribution qualifies as partial distribution if: 4 things

Answer 9

1 distribution is attributable to distributing corp.’s ceasing
To conduct qualified trade or business or consists of assets
Of qualified trade or business
2 immediately after distribution, corp. is engaged in at least 1
Qualified trade/business
3 has been actively conducted throughout the 5-year period
Ending on date of redemption
4 was not acquired by corp. within such 5 yr. Period in partially
Or wholly taxable situation

Question 10

Corporation shareholders: tax treatment of partial liquidation to them

Answer 10

Corporation must treat partial liquidation as a dividend, but
Receives the dividends received deduction

Any basis on redeemed shares from the partial liquidation is
added to the Basis of the corporations remaining shares

Question 11

Redemption of stock that was included in a decedent’s gross

Estate is usually treated as…

Answer 11

Stock sale by the shareholder (either estate or beneficiary of the estate) if 2 conditions are met

Question 12

Effect of redemptions on distributing corporate property

Answer 12

The rules for gain or loss recognition for corp. that distributes
Property in redemption for stock are same as sec. 311
Property distributions not in redemption of stock

Question 13

Corporate gain or loss on property distributions 2

Answer 13

1 Corporation recognizes gain when it redeems its stock by
Distributing property that has appreciated in value

2 corp. recognizes no loss when it redeems its stock by distributing
Property that’s declined in value

Question 14

2 ways stock redemption effects a corporation’s E&P

Answer 14

1 if corp. distributes appreciated property, the excess of FMV
over adjusted basis increases the balance of the E&P account

2 if corp distributes cash or other property, the corp.’s E&P
Balance is reduced accordingly (reduction depends on treatment
As sale or dividend)

Question 15

Redemption is treated as a dividend: effect on corporation’s E&P

Answer 15

Reduces its E&P by the amount of any cash, principal amount
Of obligations and greater of adjusted bias or FMV of property
Distributed

Question 16

Redemption is treated as a sale: effect on corporation’s E&P

Answer 16

Corp. reduces E&P by portion of its current and accumulated
E&P attributed to redeemed stock

E&P is reduced by the percentage of total outstanding shares
Redeemed

Question 17

Bailout

Answer 17

Scheme that allows corp. to make dividend distribution that

For tax purposes is treated as sale of capital asset

Question 18

Typical 4 step proceedings in preferred stock bailout

Answer 18

1 corp. issued non taxable dividend no voting preferred stock
To its common shareholders
2 recipient shareholder then sold preferred stock at its FMV
To an unrelated third party, realizing capital gain
3 corp. redeemed preferred stock from 3rd party
4 or the corp redeemed the preferred stock from the shareholder

Question 19

What does section 306 prevent

Answer 19

Preferred stock bailouts

Makes them get treated as a dividend, because stock is
considered tainted

Question 20

Section 306 stock , 4 kinds (note no stock received is common)

Answer 20

1 stock received in non taxable stock dividend
2 stock received in non taxable corporate reorganization or division
3 stock that has basis determined by reference to basis of
Sec. 306 stock
4 stock acquired in exchange to which sec. 351 applies if
Receipt of money would have been treated as dividend

Question 21

Exceptions to section 306 treatment 4

Answer 21

1 shareholder disposes of all ownership interest in common and
Preferred stock
2 corp. redeems all shareholder’s stock in partial liquidation
Qualifying for sale treatment
3 shareholder gifts 306 stock to family member (it will be taxed
Like 306 if family member sells)
4 taxpayer demonstrates to IRS that disposition was not due to
Tax avoidance

Question 22

Section 304, what does it regulate?

Answer 22

Taxation of stock redemption between related corporations

Either taxed as dividend or capital gain depending on situation

Question 23

Controlling shareholder

Answer 23

Shareholder that has over 50% ownership of voting and value of
Corporation’s stock

Question 24

If a controlling shareholder transfers stock in one corporation to the other corporation in exchange for property, the exchange must…

Answer 24

Be recast as a redemption

Question 25

Brother sister corporations: when redemption is treated as distribution

Answer 25

Treated as a dividend based on being less than the acquiring corp.’s E&P + the issuing corp.’s E&P

Question 26

Section 304: parent subsidiary corporations, when shareholder sells stock in parent corporation to a subsidiary of parent, how is the sale treated?

Answer 26

Sale is treated as a dividend based on combined E&P of both

Corporations

Question 27

Hedge agreement with shareholder-employee

Answer 27

Agreement obligates shareholder-employee to repay an portion

Of salary the IRS disallows as corporate deduction

Question 28

Bootstrap acquisition

Answer 28

Shareholder sells part of his or her stock to purchaser

and then causes corporation to redeem shareholder’s remaining shares