Chapter 18

Question 1

Under the 80 percent test, the reduction in outstanding shares resulting from the redemption is ignored.

Answer 1

False

The postredemption ratio under the 80 percent test must reflect the reduction in the total number of shares outstanding.

Question 2

A redemption of stock that is substantially disproportionate will not be taxed as a dividend to its shareholders.

Answer 2

True - taxed as capital gain

Question 3

Qualified dividends are currently taxed to individuals at a maximum rate of 25 percent.

Answer 3

False
Qualified dividends are currently taxed to individual taxpayers at a maximum rate of 20 percent (zero percent and 15 percent for lower-bracket taxpayers) not considering the 3.8% net investment income tax (NIIT).

Question 4

Under the family attribution rules, an individual is considered to own all the stock owned by his or her spouse, parents, children, and grandchildren, but not that of his or her grandparents.

Answer 4

True

Question 5

A distribution in complete redemption of stock is taxed as a dividend.

Answer 5

False
If a corporation redeems all the stock of a shareholder in a redemption that completely terminates the shareholder’s interest in the corporation and the shareholder’s family does not own stock in the same corporation, the redemption will be taxed as a sale or exchange.

Question 6

The attribution rules do not extend to stock owned directly or indirectly by or for a partnership or estate.

Answer 6

False
The attribution rules apply to stock owned directly or indirectly by or for a partnership or estate. The stock is generally considered as owned proportionately by the entity’s partners or beneficiaries.

Question 7

One requirement for a substantially disproportionate redemption is that the redeemed shareholder’s percentage of ownership or voting stock after the redemption must be less than 80 percent of his or her percentage ownership of voting stock before the redemption.

Answer 7

True

Question 8

Both the number of shares owned by the redeemed shareholder and the total number of shares outstanding will be affected by a redemption.

Answer 8

True

Question 9

A pro rata redemption among all shareholders of a corporation will not be taxed as a capital transaction.

Answer 9

True
A redemption that is pro rata among shareholders does not change the percentages of ownership, so the
redeemed shareholder’s percentage of ownership is not affected. If there is no material change in ownership for shareholders then the redemption will be classified as a dividend.

Question 10

A distribution by a corporation can sometimes be taxable as a dividend even if the corporation has no current or accumulated earnings and profits.

Answer 10

False

A distribution by a corporation that has no current or accumulated earnings and profits cannot be taxable as a dividend.

Question 11

A corporation’s redemption of its own stock will be treated as a capital transaction if the distribution is not essentially equivalent to a dividend.

Answer 11

True

Question 12

Redemptions in which the shareholder’s percentage of ownership in the corporation is not materially affected are taxed as capital transactions.

Answer 12

False
Redemptions taxed as capital transactions involve situations in which the percentage of ownership is materially affected.

Question 13

A shareholder in a family corporation may avoid the family attribution rules if all the stock he or she actually owns is redeemed and certain other requirements are met.

Answer 13

True

Question 14

The earnings and profits of a corporation for a given year are generally determined by using the corporation’s taxable income as a starting point.

Answer 14

True

Question 15

One requirement for a substantially disproportionate redemption is that immediately after the redemption, the shareholder must own less than one-half of the total combined voting power of all classes of outstanding stock entitled to vote.

Answer 15

True

Question 16

Generally, a distribution by a corporation to its shareholders with respect to the corporation’s own stock is taxable as a dividend to the extent of the corporation’s current and accumulated earnings and profits.

Answer 16

True

Question 17

A Sec. 303 redemption will be allowed to the extent that the proceeds from the redemption do not exceed a decedent’s basis in stock.

Answer 17

False
A Sec. 303 redemption is allowed to the extent the redemption proceeds do not exceed the total of all federal and state death taxes (including interest, if any) and funeral costs and administration expenses allowed as deductions to the estate.

Question 18

When a corporation having no current or accumulated earnings and profits makes a distribution to its shareholders, the distribution is always taxed as a capital gain.

Answer 18

False
When a corporation with no accumulated or current earnings and profits makes a distribution to its stockholders, the distribution is first applied to reduce the basis of the stock to zero. Any excess is taxed as a capital gain.

Question 19

A dividend includes a return of paid-in capital to a shareholder.

Answer 19

False
A dividend does not include a return of capital. It is a taxable distribution to the extent of the corporation’s current and accumulated earnings and profits.

Question 20

Stock owned by a deceased shareholder may be redeemed to pay federal estate taxes and taxed as an exchange only if the value of the decedent’s stock exceeds 65 percent of his or her adjusted gross estate.

Answer 20

False
A Sec. 303 redemption to pay death taxes will be allowed if the value of the redeeming corporation’s stock included in the gross estate exceeds 35 percent of the adjusted gross estate.