Corp Redemptions & Liquidations

Question 1

What is the accounting treatment of partial liquidation stock redemptions?

Answer 1

Treated as a sale by non-corporate shareholders.

Question 2

Define family attribution.

Answer 2

Stock owned by family members is deemed to be owned by a related taxpayer.

Question 3

What is the accounting treatment for a shareholder gain or loss on stock in complete liquidations?

Answer 3

Value of distribution (less liabilities) - adjusted basis of stock;
Generally capital gain or loss.

Question 4

Definite partial liquidation.

Answer 4

A contraction of the corporate business. The corporation must completely terminate a “qualifying” business and must continue to operate at least one qualifying business.

Question 5

List the substantially disproportionate redemption tests.

Answer 5

Control test;

Reduced interest test.

Question 6

Define entity attribution.

Answer 6

Stock owned by corporation, partnership, trust, or estate is deemed to be owned by a taxpayer who is an owner or beneficiary of the entity.

Question 7

What tests must be passed for a redemption of stock to qualify as a sale?

Answer 7

Must pass one of the following tests:
Not essentially equivalent to a dividend (NEED);
Redemption is substantially disproportionate;
Complete termination of stockholder’s interest.

Question 8

Define stock attribution.

Answer 8

When a shareholder is deemed to own stock held by other related taxpayers.

Question 9

What conditions must exist for recognizing no gain or loss on the liquidation of a subsidiary?

Answer 9

The parent must own 80% of the voting stock and other stock of the subsidiary;
The subsidiary must distribute its assets within the tax year (or within three years of the close of the tax year of the first distribution.)

Question 10

List the two types of stock attribution.

Answer 10

Entity;

Family.

Question 11

Define a “qualifying business.”

Answer 11

A trade conducted for five years prior to the determination.

Question 12

Describe the substantially disproportionate control test.

Answer 12

Shareholder must own less than 50% of voting shares after redemption.

Question 13

What conditions must exist to treat a redemption to pay death taxes as a sale?

Answer 13

Stock held by decedent must be 35% or more of adjusted gross estate;
Redemption is limited to the total of federal and state death taxes and funeral and administrative expenses.

Question 14

Who can be considered a family for the purpose of family attribution stock redemptions?

Answer 14

Includes spouse, children, grandchildren, and parents.

Question 15

What are the requirements for a partial liquidation?

Answer 15

Must completely terminate a “qualifying” business;
Must qualify as not essentially equivalent to a dividend in that it results from a genuine contraction of the corporate business.

Question 16

What is the accounting treatment for a corporation gain or loss on stock in complete liquidations?

Answer 16

Fair Market Value (not less than attached liabilities) - adjusted basis of property;
Nature of gain/loss depends on nature of asset distributed.

Question 17

Describe the substantially disproportionate interest test.

Answer 17

The shareholder must own less than 80% of the shares that were owned prior to the redemption.