Federal Taxation VIII: Corporate Redemptions, Liquidations, Reorganizations

Question 1

Redemption of Stock

Answer 1

when a corp repurchases stock from a s/h

1. can be treated as a sale of stock, triggering gain/loss
2. can be structure and taxed as a dividend

Question 2

Three Methods to Qualify a redemption as a sale

Answer 2

1. NEED - not essentially equivalent to a dividend - meaningful reduction in s/h rights
2. CONTROL or REDUCED INTEREST (s/h owns less than 50% voting shares after redemption or less than 80% of what was owned prior to redemption)
3. COMPLETE TERMINATION of s/h interest is a sale

Question 3

Family Attribution

Answer 3

Stock is owned by family members (spouse, children, grandchildren, parents - not siblings)

Question 4

Entity Attribution

Answer 4

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

Also, stock owned by the owner/beneficiary may be deemed to be owned by the entity.

Question 5

Entity Attribution: Corporations

Answer 5

1. Entity to owner: if s/h owns 50% or more

1. Owner to entity: stock owned by a 50% or more s/h is deemed owned 100% by corp

Question 6

Entity Attribution: Partnership (also estates/trusts)

Answer 6

1. Entity to owner: Stock owned by partnership is deemed to be owned by partner based on ownership interest in partnership.
2. Owner to entity: Stock owned by a partner is deemed owned in full by partnership

Question 7

Consequence to Corporation of distributing appreciated property as part of redemption

Answer 7

Appreciation recognized by the corp

Question 8

Consequence to Corporation of distributing assets that have declined in value as part of a redemption

Answer 8

Loss is not recognized

Question 9

Partial Liquidations

Answer 9

A contraction of the corporate business. Treated as a sale by noncorporate s/h.

Question 10

Objective Test for Partial Liquidation

Answer 10

corporation must completely terminate a qualifying business (trade conducted 5 yrs prior to determination), and must continue to operate at least 1 qualifying business

Question 11

Subjective test for Partial Liquidation

Answer 11

the distribution must qualify as not essentially equivalent to a dividend in that it results from a genuine contraction of the corporate business, and not just from the sale of excess inventory

Question 12

Redemption used to pay death taxes may be treated as a sale if:

Answer 12

1. stock held by the decedent is more than 35% of adjusted gross estate
2. redemption is limited to amount of federal/state death taxes + funeral/administrative expenses

Question 13

Stock Distributions

Answer 13

Not taxable to shareholder if there is no option to receive property in lieu of stock and no change in proportionate interests of the shareholders

Question 14

Stock Bailout

Answer 14

Distribution of nonvoting stock followed by sale/redemption of the stock by the corporation - treated as a dividend to the s/h to the extent of E&P at time of sale/redemption

Question 15

Complete Liquidation (detailed study text)

Answer 15

occurs with dissolution of a corporation and distribution of remaining assets

1. s/h recognize gain/loss
2. corp recognizes gain/loss
3. subsidiaries - no gain/loss recognized

Question 16

Type A reorganziation

Answer 16

merger/consolidation under state law (statutory merger)

1. Target is exchanging assets for Aquired’s stock… once Target dissolves, s/h of Target own Acquiring stock
2. At least 50% of consideration provided to Target by Acquiring must be stock in Acquiring

Question 17

Merger

Answer 17

acquired corporation (target) dissolves into another corporation (acquiring corp)

Question 18

Consolidation

Answer 18

both the acquired and the acquiring corps dissolve into a new (surviving) corporation

Question 19

Type A reorganization s/h gains/losses

Answer 19

s/h of acquired firm can only defer gains/losses to extent they receive equity of acquiring corp

forms of payment that do not qualify as equity are considered boot

Question 20

Type B reorganization (tax-free)

Answer 20

acquisition of stock of target solely in exchange for voting stock of acquiring

1. acquiring exchanges its own stock for stock Target
2. target remains in existence, but is now owned at least 80% by acquiring
3. former target shareholders now own stock in acquiring

Question 21

Type C reorganization

Answer 21

acquisition of substantially all of the assets of target solely in exchange for voting stock of acquiring firm.

1. target is exchanging its assets for acquired’s stock (90% of net asset value and 70% of gross asset value)
2. s/h of target own acquiring stock after reorganization (voting stock must be at least 80%)

Question 22

Type D reorganization

Answer 22

parent corporation divides by transferring assets to a subsidiary in exchange for subsidiary shares

1. parent distributes subsidiary share to s/h (spin -off) or redeems parent stock with subsidiary stock (split-off) or liquidates into two new corporations (split-up)
2. parent must receive/distribute control of subsidiary in the exchange (80% of all classes of stock)

Question 23

Tax-Free Reorganizations must meet judicial principles (4)

Answer 23

1. must be valid business purpose
2. continuing of the business enterprise
3. continuity of interest requirement
4. step transaction doctrine

Question 24

Reorganization: Acquiring Corp Gain/Loss

Answer 24

does not recognize gain/loss unless distributes appreciated property… appreciated property will trigger gain recognition to acquiring corp

Question 25

Reorganization: Acquired Corp Gain/Loss

Answer 25

does not generally recognize gain/loss unless distributes appreciated property

Question 26

Reorganization: S/H Gain/Loss

Answer 26

no gain/loss recognized if they receive only stock in exchange for property

if they received other property it is “boot” and gain realized is lesser of boot received or realized gain

Question 27

Reorganization: Shareholder Basis in stock received

Answer 27

Basis in stock surrendered
+ Gain recognized
- Boot received

Question 28

Tax attributes

Answer 28

of the target firm (such as NOL/carryovers) survive in reorganizations

1. if a target firm disappears, acquiring corp is entitled to target’s tax attributes
2. if target survives (as subsidiary), tax attributes stay with target

Question 29

Subsidiary

Answer 29

acquiring firm purchases stock and operates target as subsidiary, then neither firm recognizes gain/loss

Question 30

Section 338 elections

Answer 30

under certain conditions in a taxable stock purchase, acquiring firm can elect to step up the basis of the target’s asset to FMV

Question 31

Taxable Mergers

Answer 31

if acquiring firm merges target or acquires assets of target, then target corp recognizes gains/losses on xfer of its assets

adjusted basis of target’s assets = FMV. Any excess purchase price = goodwill amortized over 15 years