Corporate Redemptions and Liquidations

Question 1

What is redemption?

Answer 1

A sale of stock back to the issuing corporation by shareholders.

Question 2

When does redemption qualify for sale or exchange treatment (i.e. capital gain treatment)?

Answer 2

If the shareholder own;

• After the distribution, less than 80% of his or her total interest in the corporation before the distribution
• Less than 50% of the total combined voting power of all classes of stock entitled to vote.

Question 3

Question:

Bill owns 60% of a corporation before a redemption and 49% afterwards. Does he qualify for sale or exchange treatment?

Answer 3

Both 50% and 80% test must be met.
Bill’s 49% is less than 50% = Met.
Bill owned 60% x 80% = 48%: Bill’s new ownership must be less than 48% to qualify = Not met.

Question 4

Redemption: if doesn’t qualify for sale or exchange treatment, how is the payment from the corporation treated?

Answer 4

Treated by the same rule for distribution.

Question 5

Question:
An accrual basis calendar-year C corporation with 100,000 shares of voting common stock outstanding as of Dec 28, Yr 2.
Dec.29, Yr 2, Hall surrendered 2,000 shares to the Corp for $33,000. Hall had no interest in the Corp after it.
Hall’s adjusted basis in the 2,000 shares: $16,000 ($8 per share).
The Corps accumulated earnings and profits at January 1: 25,000. The Corp’s Yr2 net operating loss: (7,000).
What amount of income did Hall recognize from the stock surrender?

Answer 5

Anytime all of the shares are surrendered, 50% and 80% test are both met and qualify for sale or exchange treatments.

Amount realized (33,000) - Adjusted basis (16,000) = 17,000 capital gain.

Question 6

There are other ways besides 50% and 80% test to qualify as a sale or exchange: re: dividend?

Answer 6

If it is not essentially equivalent to a dividend - did not meet 80% test little and may qualify under this.

Question 7

There are other ways besides 50% and 80% test to qualify as a sale or exchange: re: complete termination of interest. Consequence?

Answer 7

If a shareholder is “deemed” to own more stock through family members, he does not qualify, but he can elect to waive family attribution rules.
Must file an agreement that he will not own any interest (nor any role of influence) next 10 yrs.

Question 8

There are other ways besides 50% and 80% test to qualify as a sale or exchange: re: partial liquidation?

Answer 8

Partial liquidation: there are at least 2 active business for last 5 yrs and one is liquidating.
Redemption treatment can be obtained.

Question 9

There are other ways besides 50% and 80% test to qualify as a sale or exchange: re: death taxes?

Answer 9

If redemption proceeds are used to pay death taxes (stock must be at least 35% of adjusted gross estate), redemption treatment is allowed.

Question 10

What is liquidations?

Answer 10

Entity ceases to be a going concern and it distributes its assets.

Question 11

Liquidation: What is the treatment for expenses incurred?

Answer 11

Deducted on the last corporate return.

Question 12

Liquidation: When property is distributed, what is the treatment of gain or losses for the corporation?

Answer 12

will be recognized.

Question 13

Liquidation: property distribution: what is assumed re: FMV and liability for corporation?

Answer 13

The FMV will never be less than any liability attached to the property. IF liability is greater, liability amount will be used to compute gain/loss.

Question 14

Liquidation: what are 2 circumstances losses should not be recognized?

Answer 14

The property had been contributed in last 5 yrs or

The property distributed to a related party.

Question 15

Liquidation: how does shareholder treat the distribution? What would be recognized?

Answer 15

As a sale or exchange and capital gain or loss is recognized.

Question 16

Liquidation: what would be the basis of the property distributed for shareholders?

Answer 16

FMV on date of distribution.

Question 17

Question:
Under liquidation, the Corp distributed land: adjusted basis of $26,000 to its solo shareholder.
The land’s liability: $38,000, which shareholder assumed. FMV: $35,000.
What is the amount of the Corp’s recognized gain or loss?

Answer 17

Liability 38,000 > FMV 35,000.

Amount realized 38,000 - Adjusted basis 26,000 = Sec. 1231 gain of 12,000.

Question 18

Question:
Non-corporate shareholders. Each regular shareholder received liquidating distribution of $2,000 cash and land with a basis of $5,000, FMV of $10,500. Before liquidation, each shareholder’s tax basis in stock was $6,500.
What amount of gain should each shareholder recognize on the liquidating distribution?

Answer 18

Amount realized: cash 2,000+Land 10,500=$12,500 - adjusted basis 6,500 = $6,000 capital gain.

Question 19

When corporation liquidates a subsidiary, what is the treatment for gain or losses? Basis in the subsidiary’s assets?

Answer 19

No gain or loss will be recognized.

The basis will stay the same.

Question 20

Redemption: are expenses related to it deductible?

Answer 20

No except for interest expense on loans to repurchase stocks.

Question 21

What is the treatment of partial liquidation for noncorporate shareholders? Corporate shareholders?

Answer 21

N: Capital.
Corporate: Dividend income.