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Exam 14: Corporate Nonliquidating and Liquidating Distributions

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Sunapee Corporation reported taxable income of $700,000 from operations for year 1.During the year, the company made a distribution of land to its sole shareholder, Jean McCarthy.The land's fair market value was $125,000 and its tax and E&P basis to Sunapee was $75,000.Jean assumed a mortgage attached to the land of $25,000.Compute Sunapee's total taxable income and federal income tax paid as a result of the distribution.Using your solution, compute Sunapee's current E&P for year 1.

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Taxable income of $7...

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Pine Creek Company is owned equally by Bob and his sister Samantha, each of whom own 1,000 shares in the company.On December 31, year 1, Pine Creek redeemed 200 of Samantha's shares for $5,000,000 in a transaction treated as an exchange by Samantha.Pine Creek has current E&P of $10,000,000 and accumulated E&P of $30,000,000 (computed without regard to the stock redemption).Assuming Pine Creek did not make any dividend distributions during year 1, by what amount does the company reduce its E&P as a result of the redemption?

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$4,000,000
Pine Creek reduces its accumu...

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Terrapin Corporation incurs federal income taxes of $250,000 in year 1.Terrapin deducts the federal income taxes in computing its current earnings and profits for year 1.

Billie transferred her 20 percent interest to Jean Company as part of a complete liquidation of the company.In the exchange she received land with a fair market value of $200,000.Billie's basis in the Jean stock was $100,000.The land had a basis to Jean Company of $400,000.What amount of loss does Jean recognize in the exchange and what is Billie's basis in the land she receives? Billie is not considered a related party to Jean Company.

Beaver Company reports current E&P of $100,000 in year 1 and accumulated E&P at the beginning of the year of $200,000.Beaver distributed $400,000 to its sole shareholder on January 1, year 1.The shareholder's tax basis in her stock in Beaver is $200,000.How is the distribution treated by the shareholder in year 1?

Brothers and sisters are considered "family" under the stock attribution rules that apply to stock redemptions.

Mike and Michelle decided to liquidate their jointly owned corporation, Pennsylvania Corporation.After liquidating its remaining inventory and paying off its remaining liabilities, Pennsylvania had the following tax accounting balance sheet. $\begin{array} { l r r r r } &&& \text { Appreciation } \\& \text { Tax Basis } & \text { FMV } & \text {(Depreciation)}\\\text { Cash } & \$ 200,000 & \$ 200,000 & \\\text { Building } & 200,000 & 100,000& 100,000 \\\text { Land } & \underline{100,000 }&\underline{ 150,000 }& \underline{50,000} \\\text { Total}&\underline{ \$ 500,000} &\underline{ \$ 450,000} & \underline{\$ 50,000}\\\end{array}$ Under the terms of the agreement, Mike will receive the $200,000 cash in exchange for his 40 percent interest in Pennsylvania.Mike's tax basis in his Pennsylvania stock is $50,000.Michelle will receive the building and land in exchange for her 60 percent interest in Pennsylvania.Her tax basis in the Pennsylvania stock is $100,000. What amount of gain or loss does Michelle recognize in the complete liquidation and what is her tax basis in the building and land after the complete liquidation?

Which of the following stock distributions would be nontaxable to the shareholder?

Viking Corporation is owned equally by Sven and his wife, Olga, each of whom hold 100 shares in the company.Viking redeemed 75 shares of Sven's stock for $2,000 per share on December 31, year 1.Viking has total (current plus accumulated) E&P of $500,000.What are the tax consequences to Viking as a result of the stock redemption?

The recipient of a nontaxable stock distribution will have a zero tax basis in the stock received in the distribution.

Which of the following statements does not describe a tax consequence to shareholders in a complete liquidation?

Crescent Corporation is owned equally by George and his daughter Olympia, each of whom own 100 shares in the company.George wants to retire from the company, and it was decided that the company will redeem all 100 of his shares for $10,000 per share on December 31, year 1.George's income tax basis in each share is $2,000.Crescent has current E&P of $1,000,000 and accumulated E&P of $5,000,000.What must George do to ensure that the redemption will be treated as an exchange?

Tar Heel Corporation had current and accumulated E&P of $500,000 at December 31, year 1.On December 31, the company made a distribution of land to its sole shareholder, William Roy.The land's fair market value was $100,000 and its tax and E&P basis to Tar Heel was $25,000.William assumed a mortgage attached to the land of $10,000.The tax consequences of the distribution to William in year 1 would be:

Yellowstone Corporation made a distribution of $300,000 to Cheney Inc.in partial liquidation of the company on December 31, year 1.Cheney Inc.owns 50 percent of Yellowstone Corporation (1,000 shares).The other 50 percent is owned by an unrelated corporation.The distribution was in exchange for 50 percent of Cheney's stock in the company (500 shares).At the time of the distribution, the shares had a fair market value of $800 per share.Cheney's income tax basis in the shares was $500 per share.Yellowstone had total E&P of $5,000,000 at the time of the distribution.What is the amount and character (capital gain or dividend)of any income or gain recognized by Cheney as a result of the partial liquidation?

Packard Corporation transferred its 100 percent interest to State Corporation as part of a complete liquidation of State.In the exchange Packard received land with a fair market value of $300,000.Packard's basis in the State stock was $600,000.The land had a basis to State Company of $500,000.What amount of loss does State recognize in the exchange and what is Packard's basis in the land it receives?

Orchard, Inc., reported taxable income of $800,000 in year 1 and paid federal income taxes of $168,000.Included in the company's computation of taxable income is gain from the sale of a depreciable asset for $200,000.The income tax basis of the asset was $50,000.The E&P basis of the asset using the alternative depreciation system was $75,000.Compute the company's current E&P for year 1.

The recipient of a taxable stock distribution will have a tax basis in the stock equal to the fair market value of the stock received.

Madison Corporation reported taxable income of $400,000 in year 2 and accrued federal income taxes of $84,000.Included in the year 2 taxable income computation were regular depreciation of $200,000 (E&P depreciation is $60,000) , first-year expensing under §179 of $100,000, and a net capital loss carryover of $20,000 from year 1.The corporation's current earnings and profits for year 2 would be:

Houghton Corporation reports negative current E&P of $500,000 and negative accumulated E&P of $800,000.Houghton distributed $100,000 to its sole shareholder, Blossom Applegate, on December 31, year 1.Blossom's tax basis in her Houghton stock is $50,000.What is the tax treatment of the distribution to Blossom and what is her tax basis in Houghton stock after the distribution?

Tiger Corporation, a privately held company, has one class of voting common stock, of which 1,000 shares are issued and outstanding.The shares are owned as follows: $\begin{array}{llcc} \text { Mark Bird } &300 \\ \text { Connie Bird (Mark's wife) } &250\\ \text {Borruie Bird (Mark's daughter) } &200\\ \text { Billy Bird (Mark's brother)} &\underline{250}\\ \text { Total } &\underline{1,000}\\\end{array}$ How many shares of stock is Mark deemed to own under the family attribution rules in a stock redemption?