Study Unit 13

Question 1

Under what conditions are redemptions of stock by a c corporation treated as sales instead of distributions?

Answer 1

A redemption is a sale when any of the following conditions are met:

- The redemption is not essentially equivalent to a dividend.
- The redemption is substantially disproportionate.
- The distribution is in complete redemption of all of a shareholder’s stock.
- The distribution is to a No corporate shareholder in partial liquidation.
- The distribution is received by an estate.

Question 2

What is the amount of gain or loss recognized by a C corporation in a stock redemption treated as distributions?

Answer 2

• A corporation recognizes a gain (FMV - AB) as if the property were sold to the distribute
• A corporation does not recognize any loss unless the redemption is
  • In complete liquidation of the corporation or
  • Of stock held by an estate

Question 3

If a C corporation distributes depreciable property, what is the amount of ordinary income?

Answer 3

Ordinary income = Lesser of realized gain or accumulated depreciation

Question 4

How are nonqualifying stock redemptions by C Corporations treated by the shareholder?

Answer 4

The shareholder treat a nonqualifying redemption in the same manner as a regular distribution.

Redemption Amount Treatment by Shareholder

• To the extent of current E&P - Dividend income (taxable)
• Then to the extent of accum E&P - Dividend income (taxable)
• Then to the extent of basis in stock - Return of capital (nontaxable)
• Excess - Gain on sale (taxable)

Question 5

In the context of classifying a stock redemption as a sale instead of a distribution, describe a substantially disproportionate redemption.

Answer 5

A redemption is substantially disproportionate with respect to a shareholder if, immediately after the redemption, the shareholder owns

-	Less than 50% of the voting power of outstanding stock and

- Less than 80% each of the interest in the
		- Voting stock owned before the redemption and
		- Common stock owned before the redemption

Question 6

In a complete liquidation of a C corporation, how is the amount of gain or loss recognized by the corporation determined?

Answer 6

Recognized gain = Greater of FMV or liability relief - AB of property

Recognized loss = Realized loss - Pre-contribution loss

NOTE: Loss is limited if distribute is a more-than-50% shareholder

Question 7

In a partial liquidation of a C corporation, what are the tax consequences on the (1) distributor and (2) corporate distributee?

Answer 7

The distributor recognizes gain but not loss. The sis tribute treats the distribution as a dividend to the extent of the distributor’s E&P.

Question 8

In a partial liquidation of a C corporation, what are the tax consequences on a distributee if it is a noncorporate entity?

Answer 8

The distributee treats the partial liquidation as a sale.

Question 9

I a subsidiary corporation make a liquidating distribution to the parent corporation, what is the amount of gain or loss recognized by the parent and subsidiary corporation?

Answer 9

Neither the parent corporation nor the controlled subsidiary recognizes gain or loss.

Question 10

In a reorganization of a C corporation, what is the amount of gain or loss recognized by the shareholders?

Answer 10

Recognized gain = Lesser of realized gain or boot received

Recognized loss = 0

Question 11

List the different types of corporate reorganization that qualify for nonrecognition treatment.

Answer 11

• Type A - Statutory merger or consolidation
• Type B - Stock-for-stock
• Type C - Stock-for-assets
• Type D - Division
• Type E - Recapitalization
• Type F - Reincorporation
• Type G - Bankruptcy reorganization

Question 12

For sale tax purposes, when might a business have a nexus in a state?

Answer 12

A business might have a nexus if it has any of the following:

- A physical location in the state
- Resident employees working in the state
- Real or intangible property (owned or rented) within the state
- Employees who regularly solicit business within the state
- Significant sales or transaction within the sate

Question 13

In the context of dividing income for tax purposes among multiple tax jurisdictions, compare (1) allocation of income and (2) apportionment of income.

Answer 13

Allocation Identifying nonbusiness income to a specific state

Apportionment Identifying business income from operations to a specific state

Question 14

When dividing income for tax purposes among multiple tax jurisdictions, how is business income apportioned?

Answer 14

Apportioned Income = Total business income x (Property tractor + Payroll factor + Sales factor) / 3

Property factor = Average value of in-state real and tangible personal property used / Average value of all real property
and tangible personal property used

Payroll factor = In-state compensation paid / Total compensation paid

Sales factor = In-state sales / Total sales