Tax

Question 1

Section 301

Answer 1

Distribution of Property

Question 2

Section 301(c)(1), (2), (3)

Answer 2

Dividends (per E&P), against bases, capital gain in excess of basis,

Question 3

Section 302

Answer 3

Distribution in redemption of stock

Question 4

Corporate distribution - effects on recipients

Answer 4

Sections 301, 302, 303, 304, 305, 306, 307

Question 5

Corporate distribution - effects on corporation

Answer 5

Sections 311 and 312

Question 6

Corporate distribution - definitions, constructive ownership of stock

Answer 6

Sections 316, 317, 318

Question 7

Section 302(b(1)

Answer 7

redemption not equivalent to dividend

Question 8

Section 302(b(2)

Answer 8

substantially disproportionate redemption of stock
This paragraph shall not apply unless immediately after the redemption the shareholder owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote.
302(b)(2)(C)Definitions
For purposes of this paragraph, the distribution is substantially disproportionate if—
302(b)(2)(C)(i) The ratio which the voting stock of the corporation owned by the shareholder immediately after the redemption bears to all of the voting stock of the corporation at such time,
is less than 80 percent of—
302(b)(2)(C)(ii) The ratio which the voting stock of the corporation owned by the shareholder immediately before the redemption bears to all of the voting stock of the corporation at such time.
For purposes of this paragraph, no distribution shall be treated as substantially disproportionate unless the shareholder’s ownership of the common stock of the corporation (whether voting or nonvoting) after and before redemption also meets the 80 percent requirement of the preceding sentence. For purposes of the preceding sentence, if there is more than one class of common stock, the determinations shall be made by reference to fair market value.

Question 9

Section 303

Answer 9

Distribution in redemption of stock to pay death taxes

Question 10

Section 304

Answer 10

Redemption through use of related corporations

Question 11

Section 305

Answer 11

Distribution of stock and stock rights

Question 12

Section 306

Answer 12

Disposition of certain stock
306(c)Section 306 Stock Defined
306(c)(1)In General - For purposes of this subchapter, the term “ section 306 stock” means stock which meets the requirements of subparagraph (A), (B), or (C) of this paragraph.
306(c)(1)(A)Distributed to Seller
306(c)(1)(B)Received in a Corporate Reorganization or Separation
306(c)(1)(C)Stock Having Transferred or Substituted Basis

Question 13

section 307

Answer 13

Basis of stock and stock rights acquired in distribution

Question 14

section 311

Answer 14

Taxability of corporation on distribution

Question 15

Section 311(b)(1)

Answer 15

Distribution of appreciated property
311(b)(1)(A) A corporation distributes property (other than an obligation of such corporation) to a shareholder in a distribution to which subpart A applies, and
311(b)(1)(B) The fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation),
then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value.

Question 16

Section 311(b)(2)

Answer 16

Treatment of Liabilities

Rules similar to the rules of section 336(b) shall apply for purposes of this subsection.

Question 17

Section 312

Answer 17

Effects on earnings and profits
312(a)General Rule - Except as otherwise provided in this section, on the distribution of property by a corporation with respect to its stock, the earnings and profits of the corporation (to the extent thereof) shall be decreased by the sum of—
312(a)(1) The amount of money,
312(a)(2) The principal amount of the obligations of such corporation (or, in the case of obligations having original issue discount, the aggregate issue price of such obligations), and
312(a)(3) The adjusted basis of the other property,

so distributed.

Question 18

section 312(b)

Answer 18

Distributions of Appreciated Property
On the distribution by a corporation, with respect to its stock, of any property (other than an obligation of such corporation) the fair market value of which exceeds the adjusted basis thereof—
312(b)(1) The earnings and profits of the corporation shall be increased by the amount of such excess, and
312(b)(2) Subsection (a)(3) shall be applied by substituting “fair market value” for “adjusted basis”. For purposes of this subsection and subsection (a), the adjusted basis of any property is its adjusted basis as determined for purposes of computing earnings and profits.

Question 19

Section 312(c)

Answer 19

Adjustment for liabilities
In making the adjustments to the earnings and profits of a corporation under subsection (a) or (b), proper adjustment shall be made for—
312(c)(1) The amount of any liability to which the property distributed is subject, and
312(c)(2) The amount of any liability of the corporation assumed by a shareholder in connection with the distribution.

Question 20

Section 316

Answer 20

Dividend defined
For purposes of this subtitle, the term “dividend” means any distribution of property made by a corporation to its shareholders—
316(a)(1) Out of its earnings and profits accumulated after February 28, 1913, or
316(a)(2) Out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.
Except as otherwise provided in this subtitle, every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits. To the extent that any distribution is, under any provision of this subchapter, treated as a distribution of property to which section 301 applies, such distribution shall be treated as a distribution of property for purposes of this subsection.

Question 21

Section 317

Answer 21

Other definitions
317(a)Property - For purposes of this part, the term “property” means money, securities, and any other property; except that such term does not include stock in the corporation making the distribution (or rights to acquire such stock).

Question 22

Section 318

Answer 22

Constructive ownership of stock

Question 23

Corporate Liquidation - effects on recepients

Answer 23

Sections 331, 332, 334

Question 24

Corporate liquidations - effects on corporation

Answer 24

Sections 336, 337, 338

Question 25

Corporate liquidations - definition and Special Rul

Answer 25

Sec 346

Question 26

Corporate Organization

Answer 26

Sec 351 - Transfer to Corporation Controlled by Transferor

Question 27

Corporate Organization & Reorganization - Effects on Shareholders and Security Holders

Answer 27

Sec 354, 355, 356, 357, 358

Question 28

Sec 354

Answer 28

Exchange of stock and Securities in Certain Reorganizations

Question 29

Sec 355

Answer 29

Distribution of Stock and Securities of a Controlled Corporation

Question 30

Sec 356

Answer 30

Receipt of Additional Consideration

Question 31

Sec 357

Answer 31

Assumption of Liability

Question 32

Sec 358

Answer 32

Basis to Distributees

Question 33

Sec 354 requirement

Answer 33

354(a)(1) - No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
Applies only at the case of reorganization.

Question 34

Section 356 - Receipt of Additional Consideration

Answer 34

356(a)(1)(A) section 354 or 355 would apply to an exchange but for the fact that
356(a)(1)(B) The property received in the exchange consists not only of property permitted by section 354 or 355 to be received without the recognition of gain but also of other property or money,
then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
—————
in the case of sec 354 and 355 if property such money received in addition to stock or securities, gain should be recognized in excess of such money and the FMV of such other property.

Question 35

Sec 358 - Basis to Distributees (shareholders receiving stock in 351, 354, 356, or 361)

Answer 35

(shareholders receiving stock in 351, 354, 356, or 361)
358(a)(1)Nonrecognition Property - The basis of the property permitted to be received under such section without the recognition of gain or loss shall be the same as that of the property exchanged—
358(a)(1)(A) Decreased by—
358(a)(1)(A)(i) The fair market value of any other property (except money) received by the taxpayer,
358(a)(1)(A)(ii) The amount of any money received by the taxpayer, and
358(a)(1)(A)(iii) The amount of loss to the taxpayer which was recognized on such exchange, and
358(a)(1)(B) Increased by—
358(a)(1)(B)(i) The amount which was treated as a dividend, and
358(a)(1)(B)(ii) The amount of gain to the taxpayer which was recognized on such exchange (not including any portion of such gain which was treated as a dividend).

Question 36

Stock Basis Allocation in Organization or Reorganization

Answer 36

Sec 358(b)

Question 37

Sec 351(b)

Answer 37

BOOT
351(b)Receipt of Property - If subsection (a) would apply to an exchange but for the fact that there is received, in addition to the stock permitted to be received under subsection (a), other property or money, then—
351(b)(1) Gain (if any) to such recipient shall be recognized, but not in excess of—
351(b)(1)(A) The amount of money received, plus
351(b)(1)(B) The fair market value of such other property received; and
351(b)(2) No loss to such recipient shall be recognized.

Question 38

Corporate Organization and Reorganization - Effects on Corporations

Answer 38

Sec 361 and 362

Question 39

Sec 361

Answer 39

Nonrecognition of Gain or Loss to Corporations; Treatment of Distributions
361(a)General Rule - No gain or loss shall be recognized to a corporation if such corporation is a party to a reorganization and exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.

Question 40

Sec 362

Answer 40

Basis to Corporations
362(a)Property Acquired by Issuance of Stock or as Paid-in Surplus - If property was acquired by a corporation—
362(a)(1) In connection with a transaction to which section 351 (relating to transfer of property to corporation controlled by transferor) applies, or
362(a)(2) As paid-in surplus or as a contribution to capital,
then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer.

Question 41

Sec 362(c)

Answer 41

362(c)Special Rule for Certain Contributions to Capital
362(c)(1)Property Other than Money - Notwithstanding subsection (a)(2), if property other than money—
362(c)(1)(A) Is acquired by a corporation as a contribution to capital, and
362(c)(1)(B) Is not contributed by a shareholder as such,
then the basis of such property shall be zero.
362(c)(2)Money
Notwithstanding subsection (a)(2), if money—
362(c)(2)(A) Is received by a corporation as a contribution to capital, and
362(c)(2)(B) Is not contributed by a shareholder as such,
then the basis of any property acquired with such money during the 12-month period beginning on the day the contribution is received shall be reduced by the amount of such contribution. The excess (if any) of the amount of such contribution over the amount of the reduction under the preceding sentence shall be applied to the reduction (as of the last day of the period specified in the preceding sentence) of the basis of any other property held by the taxpayer. The particular properties to which the reductions required by this paragraph shall be allocated shall be determined under regulations prescribed by the Secretary.

Question 42

Corporate Organization and Reorganization - Special Rule; Definitions

Answer 42

Sec 367 and 368

Question 43

Sec 367

Answer 43

Foreign Corporations

Question 44

Sec 368

Answer 44

Definitions Relating to Corporate Reorganizations

Question 45

Carryovers

Answer 45

Sec 381, 382, 383, and 384

Question 46

Sec 381

Answer 46

Carryovers in Certain Corporate Acquisitions

Question 47

Sec 382

Answer 47

Limitation on Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change

Question 48

Sec 383

Answer 48

Special Limitations on Certain Excess Credits, Etc.

Question 49

Sec 384

Answer 49

Limitation on Use of Preacuisition Losses to Offset Built-in Gains

Question 50

Sec 385

Answer 50

Treatment of Certain Interest in Corporations as Stock or Indebtedness

Question 51

Sec 1032

Answer 51

Exchange of stock for property
(a)Nonrecognition of gain or loss.
No gain or loss shall be recognized to a corporation on the receipt of money or other property in exchange for stock (including treasury stock) of such corporation. No gain or loss shall be recognized by a corporation with respect to any lapse or acquisition of an option, or with respect to a securities futures contract (as defined in section 1234B), to buy or sell its stock (including treasury stock).

Question 52

Reg. Sec. 1.1032-1

Answer 52

Disposition by a corporation of its own capital stock

Question 53

Reg. Sec. 1.1032-2

Answer 53

Disposition by a corporation of stock of a controlling corporation in certain triangular reorganization

Question 54

Reg. Sec. 1.1032-3

Answer 54

Disposition of stock or stock options in certain transactions not qualifying under any other nonrecognition provision.

Question 55

Sec 1504(a)(2)

Answer 55

1504(a)(2) 80- PERCENT VOTING AND VALUE TEST.— The ownership of stock of any corporation meets the
requirements of this paragraph if it—
1504(a)(2)(A) possesses at least 80 percent of the total voting power of the stock of such corporation,
and
1504(a)(2)(B) has a value equal to at least 80 percent of the total value of the stock of such
corporation.

Question 56

Sec 368(c)

Answer 56

368(c) CONTROL DEFINED.— For purposes of part I (other than section 304), part II, this part, and part V,
the term “control” means the ownership of stock possessing at least 80 percent of the total combined voting
power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other
classes of stock of the corporation.

Question 57

Rev. Rul. 59-259

Answer 57

Rev. Rul. 59-259: Held that "control" as defined by § 368(c) requires ownership of stock possessing at least 80 percent of the
total combined voting power of all classes of voting stock and the ownership of at least 80 percent of the total number of shares of each class of outstanding non-voting stock.

Question 58

Rev. Rul. 69-126

Answer 58

Rev. Rul. 69-126: Preferred stock that may be voted to elect three of the eight members of the board of directors is “voting
stock.” The requirements of § 1504(a) with respect to voting power are met if stock possessing 80 percent of the voting power of all classes of voting stock taken together is owned.
Stock is considered voting if the holders are entitled to vote for the board of directors.

Question 59

Rev. Rul. 56-613

Answer 59

368(c) specifically defines control in terms of direct ownership of stock and not in terms of practical control. There is
no basis for disregarding the separate legal entities of the parent and its subsidiary and for attributing the
subsidiary’s ownership f the X corporation stock to the parent.
The 80% control under sec 368(c) should be a direct ownership of 80% of all voting classes of stock immediately after the transaction - whether or not such acquiring corporation had control immediately before the acquisition.

Question 60

Rev. Rul. 84-79

Answer 60

Consolidated returns: affiliation: direct ownership of stock: revocable trust.– A parent corporation that is
the grantor and sole beneficiary of a revocable voting trust “directly” own’s stock that it transfers to that voting
trust under section 1504(a) of the Code.
1501 of the Code provides that an affiliated group of corporations shall have the privilege of filing a consolidated return.
This recognizes that substance rather than form should control in determining ownership. “The direct ownership required by the statute is not merely possession of the naked legal title, but beneficial ownership, which carries with it dominion over the property.” Macon, Dublin & Savannah Railroad Co. v. Commissioner, 40 B.T.A. 1266, 1273 (1939), acq., 1940-1 C.B. 3.

Question 61

Rev. Rul. 73-28

Answer 61

the form of the stock is important to constitute voting control under 368(c). It does not matter whether the holder can vote under the state law or other provisions.

Question 62

Rev. Rul. 72-72

Answer 62

Here, a condition of vesting period to have the right to vote make the stock to be non-voting stock and not qualified under section 368(‘c).
If the vesting period was passed, then the stock could be considered as voting stock.

What are the restriction upon the transfer? If the answer is nothing the agreement is more economic situation.
Voting for board of directors is the key to have voting stock.

Question 63

Rev. Rul. 58-614

Answer 63

the purchase of some shareholders shares by the corporation does not constitute dividends to the remaining shareholders, where the remaining shareholders did not have obligation or binding agreement to purchase the other shareholders shares. If the remaining shareholders had binding agreement to purchase the other shareholders shares, and the agreement assigned to the corporation to act on their behalf, then it would be considered as dividends to the remaining shareholders.
○ On the other hand, if the stock is in reality purchased by a remaining shareholder and paid for by the corporation, then, regardless of the form of the transaction, the payment will be considered a dividend to the shareholder who made the purchase.
○ If a shareholder surrenders stock to a corporation for less than its fair market value, such surrender may be a gift or compensation to the shareholders who remain interested in the corporation.
Conversely, if a corporation pays more than fair market value for its stock, the payment may be compensation to the shareholder surrendering stock or may be a gift to him from the shareholders who remain interested in the corporation.

Question 64

Rev. Rul. 69-630

Answer 64

Asset sell between 2 brother/sister corp owned 100% by the shareholder (an individual), where the sell price is understated, can be considered as distribution from the transferor corp to the shareholder and contribution to the transferee corporation.

Question 65

Rev. Rul. 69-608

Answer 65

○ Where a corporation redeems stock from a retiring shareholder, the fact that the corporation in purchasing the shares satisfies the continuing shareholder’s executory contractual obligation to purchase the redeemed shares does not result in a distribution to the continuing shareholder provided that the continuing shareholder is not subject to an existing primary and unconditional obligation to perform the contract and that the corporation pays no more than fair market value for the stock redeemed.
○ On the other hand, if the continuing shareholder, at the time of the assignment to the corporation of his contract to purchase the retiring shareholder’s stock, is subject to an unconditional obligation to purchase the retiring shareholder’s stock, the satisfaction by the corporation of his obligation results in a constructive distribution to him. The constructive distribution is taxable as a distribution under section 301 of the Internal Revenue Code of 1954.
If there is an unconditional contract between the shareholders that at the time of retirement of one of the shareholder the other shareholder acquire retiring shareholder’s shares, and the unconditional agreement is assigned to the corporation to redeem the retiring shareholder shares, the redemption is considered as distribution to the surviving shareholder.
In contrast, if there is no unconditional agreement or the agreement is between the shareholders and the corporation, the redemption is not considered as distribution to the surviving shareholder.

Question 66

Falkoff v. Comm’r, 604 F.2d 1045 (7th Cir. 1979)

Answer 66

Business purpose
Economic Substance
The court argument for step transaction was the calendar year end which was set by the government.
The taxpayer made transactions and distribution in different calendar year when it did not have E&P.

Question 67

Rev. Rul. 75-493

Answer 67

X acquired Y shares from its sole shareholder A, Y liquidated to X, and distributed cash to A. the cash did not reduce the purchase price.
Before liquidation Y had positive E&P and the cash to A did not reduced the purchase price. Thus the payment to A is dividend under 301.
Section 1.61-9(c) of the Income Tax Regulations provides, in part, that when stock is sold after the declaration of a dividend and after the date as of which the seller becomes entitled to the dividend, the dividend ordinarily is income to the seller.

Question 68

Waterman Steamship 430 F.2d 1185 (1970)

Answer 68

SOURCE OF THE FOUND
Court stated that we must look through the form and search out the substance of a transaction. The basic concept is involving a series of transactions designed and executed as a part of a unitary plan to achieve an intended result.
○ Three factors: 1) Timing; 2) Source of the funds; 3) Business purpose

Is it a purchase price adjustment or a true dividends?
Could the target get the loan directly from a 3rd party without the parent guarantee?
- if yes, then we can say this is a dividends, and it does not matter whether the parent would agree to pay the loan or the target would pay the loan.
- the key is whether the target would obtain a loan directly without help of the parent guarantee.

If the source of the funds come from the target without getting any guarantee before or after the transaction, the distribution can be dividends.

In Waterman, an unrelated party agreed to purchase the stock of two subsidiaries of Waterman. One subsidiary declared a dividend in the form of a promissory note to Waterman. One hour later, Waterman sold the stock in both subsidiaries to the buyer, who then loaned funds to the subsidiary declaring the dividend for the purpose of paying the note. The subsidiary then issued a check to Waterman in payment of the note. Because the funds to pay the dividend were actually furnished by the buyer, that amount was considered as part of the purchase price paid by the buyer for the stock of the subsidiary. Thus, the form of the transaction was a sham designed to disguise the true substance of the transaction.

Question 69

Litton Industries 89 T.C. 1086 (1987)

Answer 69

before the sale of the corp, the corp declared the dividends and a note was issued. After the sale, buyer paid partial purchase price and the remaining amount for the note.
Dividend declared by sub and paid by promissory note prior to sell is held to be a dividend and not part of the sale.

Question 70

TSN Liquidating 624 F.2d 1328 (1980)

Answer 70

• Asset distributed to the parent corporation by the subsidiary, immediately prior to the sale, constituted a dividends not consideration received as part of the sale.

We agree that the transaction must be viewed as a whole and we accept the district court’s finding of fact that the dividend of the unwanted assets was “part and parcel of the purchase arrangement with Union Mutual,” motivated specifically by Union Mutual’s unwillingness to take and pay for such assets. That being the case, we decline to focus on the business purpose of one participant in the transaction-a corporation controlled by the taxpayer-and instead find that the business purpose for the transaction as a whole, viewed from the standpoint of the taxpayer, controls.

Question 71

Rev. Rul. 76-385

Answer 71

NOT ESSENTIALLY EQUIVALENT TO DIVIDENDS UNDER 302(b)(1) - a meaningful reduction
In United States v. Davis, 397 U.S. 301 (1970), rehearing denied, 397 U.S. 1071 (1970), 1970-1 C.B. 62, the Supreme Court of the United States held that a redemption must result in a meaningful reduction of the shareholder’s proportionate interest in the corporation in order to qualify as not essentially equivalent to a dividend within the meaning of section 302(b)(1) of the Code and that the business purpose of the redemption is irrelevant to this determination. The Supreme Court further held that section 318(a) applies for the purpose of determining whether a distribution is “not essentially equivalent to a dividend” under section 302(b)(1).
Here, it was a redemption of a public corp. a small ownership of stock. However, there was a meaningful reduction of the ownership.

Based on the calculation, Y’s percentage of ownership in Z was 0.0001118% before to 0.0001081%

Question 72

Rev. Rul. 81-289

Answer 72

NOT ESSENTIALLY EQUIVALENT TO DIVIDENDS UNDER 302(b)(1) - a meaningful reduction
In United States v. Davis, 397 U.S. 301 (1970), rehearing denied, 397 U.S. 1071 (1970), Ct. D. 1937, 1970-1 C.B. 62, the Supreme Court of the United States held that
(1) the constructive ownership of stock rules of section 318(a) of the Code apply to redemptions under section 302(b)(1);
(2) the business purpose of a redemption is irrelevant under section 302(b)(1); and
(3) a redemption of stock from a sole shareholder (which is necessarily pro rata) will always have the effect of a dividend.
in order for a redemption to qualify under section 302(b)(1), it must result in a “meaningful reduction in the shareholder’s proportionate interest in the corporation.”

In Himmel v. Commissioner, 338 F.2d 815 (2d Cir. 1964). In Himmel, the Second Circuit emphasized that stock ownership involves these important rights:
(1) the right to vote and thereby exercise control;
(2) the right to participate in current earnings and accumulated surplus; and
(3) the right to share in net assets on liquidation.
————–
Here, it was a redemption of the sole shareholder which did not result in a change in the percentage of ownership.

Question 73

Rev Rul 66-37

Answer 73

redemption of preferred stock while there is no change in voting stock, does not constitute redemption. Thus, sec 302(b) did not apply,
X’s adjusted basis for Y’s preferred stock will be transferred to and allocated ratably among the shares of Y’s common stock owned by X at the time of the redemption.
——————
For tax planning perspective, shifting of basis of one class of stock to another class of stock.

Question 74

NOT ESSENTIALLY EQUIVALENT TO DIVIDENDS UNDER 302(b)(1)

Answer 74

Rev Rul 76-385, 81-289, and 66-37

Question 75

Himmel v. Comm. (338 F.2d 815), 11/25/64:

Answer 75

Ownership of stock can involve three important rights:
(1) to vote, and thereby exercise control,
(2) to participate in current earnings and accumulated surplus, and
(3) to share in net assets on liquidation.
Common stock generally involves all of these.
Preferred stock generally the last 2
—————-
Payments to a shareholder with respect to his stock can be of three general sorts:
(1) distribution of earnings and profits which effects no change in basic relationships between the shareholder and either corporation or the other shareholders-i.e., a dividend;
(2) payments to a shareholder by a third party in exchange for ownership of the stock and its attendant rights, which accordingly eliminates or contracts pro tanto the shareholder’s rights-i.e., a sale; and
(3) payments to a shareholder by the corporation in exchange for ownership of the stock.
With the last, which can often formally be called a redemption, the effect on the shareholder’s basic rights vis-a-vis the corporation and other shareholders depends upon many facts.

Question 76

U.S. v. Davis, 2d 70-827, 03/23/1970:

Answer 76

In United States v. Davis, 397 U.S. 301 (1970), rehearing denied, 397 U.S. 1071 (1970), Ct. D. 1937, 1970-1 C.B. 62, the Supreme Court of the United States held that
(1) the constructive ownership of stock rules of section 318(a) of the Code apply to redemptions under section 302(b)(1);
(2) the business purpose of a redemption is irrelevant under section 302(b)(1); and
(3) a redemption of stock from a sole shareholder (which is necessarily pro rata) will always have the effect of a dividend.
in order for a redemption to qualify under section 302(b)(1), it must result in a “meaningful reduction in the shareholder’s proportionate interest in the corporation.”
A shareholder by shareholder analysis is required to determine dividend equivalent.

Question 77

Rev Rul 75-447

Answer 77

ZENZ CASE AND COMPUTATION OF STOCK
2 Situations: 1) redeemed 2 shareholders shares and issued shares to a new shareholder; 2) 2 shareholders sold part of their shares to new shareholder and corp redeem part of their shares.
———
In situations 1 and 2, should rely Zenz - the sequence in which the events (that, is redemption and sale) occurs is irrelevant as long as both events are clearly part of an overall plan.
In situations where redemption is accompanied by an issuance of new stock (situation 1) or a sale of stock (situation 2) and both steps (sale or issuance, and the redemption) are clearly part of an integrated plan to reduce shareholder’s interest, effect will be given only to the overall result for purposes of sec 302(b)(2), and the sequence in which the events occur will be disregarded.
Per Zenz holding, the computation of stock for purposes of sec 302(b)(2)(C)(ii) should be before any part of the transactions and for purposes of sec 302(b)(2)(C)(i) should be made after the whole transaction is consummated.

Both situations meet 302(b)(2) and they are redemption.

Question 78

Zenz v. Quinlivan, 213 F.2d 914 (6th Cir. 1954)

Answer 78

Zenz - sole shareholder sold part of her stock to a competitor and remainder to the corp. equal to its earned surplus.
IRS contended that this should be a dividend if the steps of the transactions was reversed.
Court held that it was not a dividend when the transaction coupled with the sale of stock to the competitor.
———-
It is not good idea to redeem 1 share for a big amount. It would be better to redeem the shares based on the FMV of the shares. Get the FMV of the company and prorate it to all the shares with considering the cash and E&P of the company.

Question 79

Rev Rul 78-197 and Palmer v. Commissioner, 62 T.C. 684 (1974)

Answer 79

Donation of stock to a foundation and then redemption of the stock.
Tax court rejected IRS position, and held that the transfer of stock to the foundation was a valid gift, and the foundation was not bound to go through the redemption at the time it received title to the shares.
The Service will treat the proceeds of a redemption of stock under facts similar to those in Palmer as income to the donor only if the donee is legally bound, or can be compelled by the corporation, to surrender the shares for redemption
————-
Palmer
Transactions that are challenged as intermediary steps of an integrated transaction are disregarded only when found to be so interdependent that the legal relations created by one transaction would have been fruitless without the completion of the series.
If the putative assignor performs services (Lucas v. Earl), retains the property (Helvering v. Horst), or retains the control over the use and enjoyment of the income (Commissioner v. Sunnen; Corliss v. Bowers), the liability for the tax remains on his shoulders.
- However, if the entire interest in the property is transferred and the assignor retains no incidence of either direct or indirect control, then the tax on the income rests on the assignee

Question 80

Grove v. Commissioner, 490 F.2d 241 (2nd Cir. 1973)

Answer 80

Stock donated to a charity, taxpayer retained his interest in income earned from the gifts and limited his charitable deduction to the value of the interest.
Held as dividends under 301.

Question 81

Section 304 requirements

Answer 81

2 corporations
both under the common control (50% of vote or value)
it should be a stock for property (eg cash), but not stock for stock. (if the acquisition is for stock for stock it is not a 304)
in 304 the target is the issuing corporation.
304(b)(1) - the shareholder at the issuing corporation before the transaction and the same ownership in acquiring company after the transaction. Further, 318(a)(2)(C) and 318(a)(3)(C) shall be applied without regard to the 50% limitation contained therein.

No 304 - If stock going up and property coming down.
Yes 304 - if property going up and stock coming down.

Question 82

Section 304(b)(2)

Answer 82

The E&P test is 1st acquiring corp 2nd issuing corp.

Question 83

Section 304 in consolidated group

Answer 83

Reg. 1.1502-86 turns off sec 304 in US consolidated group

Question 84

Rev Rul 71-563

Answer 84

A owns 100% of corp X and B son of A owns 100% of Y. A sold 25 shares of X to Y. 
Section 318(a)(1)(A) applies which then sec 304 applies.

Question 85

Section 304(c)(1) - Control

Answer 85

For purposes of this section, control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote, or at least 50 percent of the total value of shares of all classes of stock.

Question 86

Section 304(c)(3) - Constructive Ownership

Answer 86

(B)Modification of 50-percent limitations in section 318
For purposes of subparagraph (A)—
(i)paragraph (2)(C) of section 318(a) shall be applied by substituting “5 percent” for “50 percent”, and
(ii)paragraph (3)(C) of section 318(a) shall be applied—
(I)by substituting “5 percent” for “50 percent”, and
(II)in any case where such paragraph would not apply but for subclause (I), by considering a corporation as owning the stock (other than stock in such corporation) owned by or for any shareholder of such corporation in that proportion which the value of the stock which such shareholder owned in such corporation bears to the value of all stock in such corporation.

Question 87

Reg. 1.304-2(a)

Answer 87

Under 1.304-2(a), where section 304(a)(1) applies to the transaction, the stock received by the acquiring corp should be treated as a contribution to the capital and sec 362(a) is applicable in determining the basis of such stock.
Sec 1.304-2(a), transferor’s basis for the stock in the acquiring corp shall be increased by the basis of the stock surrendered by him.
the basis of the issuing stock in the hands of acquiring is the same as the basis of the issuing stock in the hands of its pre transaction shareholder.

Question 88

Rev Rul 74-605

Answer 88

upstream sale can not be a 304 transaction

Question 89

Section 331 - requirements

Answer 89

1) Shareholder (if c corp - not having control) receives $$ value
2) Liquidating corporation

sections 331 and 334 applies to shareholders
Section 336 applies to liquidating corporation

Question 90

Section 332 - requirements

Answer 90

1) Corp shareholder
2) Liquidating corporation
3) Control - defined under section 1504 80/80 vote and value
4) Shareholder receives $$ value/property

Sections 332 and 334 apply to controlling shareholder in liquidation
Section 337 applies to liquidating corporation

Question 91

Rev. Rul. 70-106

Answer 91

fails to meet 80% ownership requirement, even the minority shareholders agreed to be redeemed before liquidation.
No redemption within 3 year prior to liquidation.

Question 92

Rev. Rul. 75-521

Answer 92

the 80% ownership test under 332(b)(1) is met, where the shareholder purchased another shareholder 50% ownership prior to adoption of liquidation plan.
the important point is from where the money comes from (source of money) same as Waterman ship case.

the fund to buy the other shareholders can come from the bank, but it would not be calleteral by the liquidating corporation assets.

Question 93

Section 7701 - Definitions

Answer 93

7701(o) - Clarification of economic substance doctrine

also many other definitions such as: taxpayer, fiscal year, residence alien, etc.

Question 94

Granite Trust Co. v. U.S.,238 F.2d 670 (1st Cir. 1956).

Answer 94

IRS argues that the transaction should be a 332 liquidation as the liquidating corp owned more than 80% by a shareholder.
court disagree that the gift and sale of the shares to minority shareholders should not be considered as part of the plan of liquidation, thus Granite trust owned less than 80% of the liquidating corp at the time adoption of liquidation plan.

Question 95

Reg 1.337-2(b)

Answer 95

define liquidation as: Ordinarily the date of the adoption of a plan of complete liquidation by a corporation is the date of adoption by the shareholders of the resolution authorizing the distribution
of all the assets of the corporation (other than those retained to meet claims) in redemption of all of its stock.

even an informal adoption of the plan to liquidate presupposes some kind of definitive determination to achieve dissolution.” Distributors Finance Corp., 20 T.C. 768, 784 (1953). The mere general intention to liquidate is not the adoption of a plan of liquidation. City Bank of Washington, 38 T.C. 713 (1962).

Question 96

George L. Riggs, Inc. v. Commissioner, 64 T.C. 474 (1975)

important case of plan of liquidation

Answer 96

Discuss the plan of liquidation date:
The letter between the legal counsel and the petitioner, does not mean that the plan of liquidation was adopted. That just mean that the legal counsel is contemplating the plan of liquidation. But no definite decision by the shareholders.

A mere intent by a taxpayer-corporation to liquidate a subsidiary prior to meeting the 80-percent requirement of section 332 should not be tantamount to the adoption of a plan of liquidation for the subsidiary at the point in time when that intent is formulated or manifested.
Based on legislative history of this section and prior judicial decisions, we conclude that section 332 is elective in the sense that with advance planning and properly structured transactions, a corporation should be able to render section 332 applicable or inapplicable.

Question 97

H.K. Porter Co. v. Comm’r, 87 T.C. 689 (1986)

Answer 97

at the time of liquidation no property distributed to common stock thus it is a sec 165*g) and loss can be recognized.

when a corp is formed, it is better to have preferred stock with liquidation preference, and having material stock bases. Thus, if the corp is a loss company with no asset to cover the common stock, the parent can claim worthless stock under sec 165.

Question 98

Rev Rul 79-10

Answer 98

The corp made a non-pro rata distribution to its shareholders under section 331. 
under 331(a)(1), the congress intended to have a liquidating distribution treated as if they were proceeds of sale of stock. thus if a shareholder receives an amount less than his pro rata share, it will be treated that he received pro rata share and the difference is treated as if he made gift, compensation, etc.

Question 99

Rev Rul 59-296

Answer 99

Parent own 100% of sub, and also sub’s bona fide creditor, an amount greater than suab assets FMV.
on a 332 liquidation, the distribution will first satisfy the debt then the shareholders. Thus, parent did not receive any property in the liquidation.

Question 100

Rev Rul 2003-125

Answer 100

Shareholder of entity that elects to change its classification from corp. to disregarded entity is allowed worthless security deduction under Code Sec. 165(g)(3); if FMV of entity’s assets, including intangibles such as goodwill and going concern value, doesn’t exceed entity’s liabilities such that shareholder doesn’t receive any payment on its stock in deemed liquidation of entity (1.332-2(b)).

class note: if the business of liquidating corp is not transferred or continued by the parent, then there might be an argument to not include the goodwill of liquidating corp in the insolvency test.

Question 101

Rev Rul 83-73

Answer 101

Under the principle of relation-back to the time of the initial exchange, the indemnity payments should be treated as if they had been contributions to the capital of the transferor corporation, made by its shareholders immediately before the merger. See Arrowsmith v. Commissioner, 344 U.S. 6 (1952), 1952-2 C.B. 136. Under section 118(a) of the Code, these payments result in no recognition of income.

Question 102

Rev Rul 73-226

Answer 102

A corporation’s payments to depositors and creditors of its insolvent foreign subsidiary bank to protect the corporation’s reputation and goodwill are deductible business expenses to the extent they exceed assets acquired, and any subsequent year recoveries of such payments are includible in its gross income for the recovery years. The corporation’s total investment in the subsidiary’s stock is deductible as a long-term capital loss

The debts and expenses of one company are not those of another. However, if the primary motive of the payer of
another company’s debts is to preserve its own good will and credit rating, rather than to help the debtor company continue in business, the payments are currently deductible. This rule is particularly applicable when the creditors are important customers of the payer. Scruggs-Vandervoort-Barney, Inc. v. Commissioner, 7 T.C. 779 (1946), acq., 1946-2 C.B. 5; L. Heller Son, Inc. v. Commissioner, 12 T.C. 1109 (1949), acq., 1949-2 C.B. 2.

Question 103

Livingston v Commissioner T.C. Memo 1966-49

Answer 103

A case related to aerosmith doctrine for the guaranteed performance

Question 104

Dinardo v Commissioner 22 T.C. 430 (1954), Acq. 1954-2 C.B. 4

Answer 104

whether payments made by petitioners’ partnership in 1948 and 1949 to Collinwood Hospital to make up operating deficits sustained by Collinwood, were properly deductible by the partnership under section 23 (a) (1) (A) of the Internal Revenue Code as ordinary and necessary business expenses.

the payments in question were made to keep Collinwood Hospital in operation and
thereby to protect the partnership’s practice and income from a loss which the partners believed would
result if the hospital closed. - Thus ordinary deduction

Question 105

Section 351 requirements

Answer 105

Transfer of property - per regulations the safe harbor for transferor is 10% of the corp value at the time of each transfer, but per GCM to RR 79-194 is 6%
exchange for stock
one/more transferrors in control - section 368(c): 80% vote and 80% other stock
control immediately after

Question 106

Rev. Rul. 79-70 - prearranged binding agreement

Answer 106

Since the sale of Newco stock by X to Y was an integral part of the incorporation and pursuant to a binding agreement entered into prior to the exchange, the control requirement of section 351(a) of the Code is determined after the sale.

Since after the sale X only owned 60% of the NewCo, the control requirement of 351 (a) is not met.

Question 107

Rev. Rul. 79-194

Answer 107

If a sec 351 contribution followed by a pre-arranged sale of the corporation stock to the other shareholders, the control is determined after the completion of the sale, since both transaction is viewed as 1 transaction.

Further, under the related GCM, a minimum of 6% contribution of a shareholder is required to have a good sec 351.

Question 108

Intermountain Lumber 65 T.C. 1025

Answer 108

In connection with formation a sub, president agreed to sale 50% of shares to a 3rd party, thus deposited the shares to an escrow account.
As the shares were deposited into an escrow account, traditional ownership attributes as legal title, voting rights, and possession of stock certificates are not conclusive. Thus, the control requirements are not met.

Question 109

Rev. Proc. 93-27 and 2001-43

Answer 109

Partnership profit interest (mgmt incentive program)