Chapter 19 Corporations: Distributions Not In Complete Liquidation

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46. LO.2, 6 Parrot Corporation is a closely held company with accumulated E & P of $300,000 and current E & P of $350,000. Tom and Jerry are brothers; each owns a 50% share in Parrot, and they share management responsibilities equally.
What are the tax consequences of each of the following independent transactions involving Parrot, Tom, and Jerry? How does each transaction affect Parrot’s E & P?
a. Parrot sells an office building (adjusted basis of $350,000; fair market value of $300,000) to Tom for $275,000.
b. Parrot lends Jerry $250,000 on March 31 of this year. The loan is evidenced by a note and is payable on demand. No interest is charged on the loan (the current applicable Federal interest rate is 7%).
c. Parrot owns an airplane that it leases to others for a specified rental rate. Tom and Jerry also use the airplane for personal use and pay no rent. During the year, Tom used the airplane for 120 hours, and Jerry used it for 160 hours. The rental value of the airplane is $350 per hour, and its maintenance costs average $80 per hour.
d. Tom leases equipment to Parrot for $20,000 per year. The same equipment can be leased from another company for $9,000 per year.
47. LO.7 Jacob Corcoran bought 10,000 shares of Grebe Corporation stock two years ago for $24,000. Last year, Jacob received a nontaxable stock dividend of
2,000 shares in Grebe Corporation. In the current tax year, Jacob sold all of the stock received as a dividend for $18,000. Prepare a letter to Jacob and a memo for the file describing the tax consequences of the stock sale. Jacob’s address is 925 Arapahoe
Street, Boulder, CO 80304.
48. LO.4 Kristen, the president and sole shareholder of Egret Corporation, has earned a salary bonus of $30,000 for the current year. Because of the lower tax rates on qualifying dividends, Kristen is considering substituting a dividend for the bonus.
Assume that the tax rates are 28% for Kristen and 34% for Egret Corporation.
a. How much better off would Kristen be if she were paid a dividend rather than salary?
b. How much better off would Egret Corporation be if it paid Kristen a salary rather than a dividend?
c. If Egret Corporation pays Kristen a salary bonus of $40,000 instead of a $30,000 dividend, how would your answers to parts (a) and (b) change?
d. What should Kristen do?
49. LO.8 Silver Corporation has 2,000 shares of common stock outstanding. Howard owns 600 shares, Howard’s grandfather owns 300 shares, Howard’s mother owns 300 shares, and Howard’s son owns 100 shares. In addition, Maroon Corporation owns 500 shares. Howard owns 70% of the stock in Maroon Corporation.
a. Applying the § 318 stock attribution rules, how many shares does Howard own in Silver Corporation?
b. Assume that Howard owns only 40% of the stock in Maroon Corporation. How many shares does Howard own, directly and indirectly, in Silver Corporation?
c. Assume the same facts as in part (a) above, but in addition, Howard owns a 25% interest in Yellow Partnership. Yellow owns 200 shares in Silver Corporation. How many shares does Howard own, directly and indirectly, in Silver Corporation?
50. LO.8 Shonda owns 1,000 of the 1,500 shares outstanding in Rook Corporation (E & P of $1 million). Shonda paid $50 per share for the stock seven years ago.
The remaining stock in Rook is owned by unrelated individuals. What are the tax consequences to Shonda in the following independent situations?
a. Rook Corporation redeems 450 shares of Shonda’s stock for $225,000.
b. Rook Corporation redeems 600 shares of Shonda’s stock for $300,000.
51. LO.8, 9 Stork Corporation (E & P of $850,000) has 1,000 shares of common stock outstanding. The shares are owned by the following individuals: Lana
Johnson, 400 shares; Lori Jones (Lana’s mother), 200 shares; and Leo Jones (Lana’s brother), 400 shares. Lana paid $200 per share for the Stork stock eight years ago.
Lana is interested in reducing her stock ownership in Stork via a stock redemption for $1,000 per share, the fair market value of the stock. Stork Corporation would distribute cash for the entire redemption transaction. Lana has inquired as to the minimum number of shares she would have to redeem to obtain favorable long-term capital gain treatment and the overall tax consequences of such a redemption to both her and Stork Corporation. Prepare a letter to Lana (1000 Main Street, St. Paul,
MN 55166) and a memo for the file in which you explain your conclusions.
52. LO.8 Cyan Corporation (E & P of $700,000) has 4,000 shares of common stock outstanding.
The shares are owned as follows: Angelica, 2,000 shares; Dean (Angelica’s son), 1,500 shares; and Walter (Angelica’s uncle), 500 shares. In the current year, Cyan redeems all of Angelica’s shares. Determine whether the redemption can qualify for sale or exchange treatment under the complete termination redemption rules in each of the following independent circumstances.
a. Angelica remains as a director of Cyan Corporation.
b. Three years after the redemption, Angelica loans $100,000 to Cyan Corporation and receives in return a two-year note receivable.
c. Dean replaces Angelica as president of Cyan Corporation.
d. Six years after the redemption, Angelica receives 250 shares in Cyan as a gift from Walter.
53. LO.8, 9 Robert and Lori (Robert’s sister) own all of the stock in Swan Corporation (E & P of $1 million). Each owns 500 shares and has a basis of $85,000 in the shares. Robert wants to sell his stock for $600,000, the fair market value, but he will continue to be employed as an officer of Swan Corporation after the sale. Lori would like to purchase Robert’s shares and, thus, become the sole shareholder in
Swan, but Lori is short of funds. What are the tax consequences to Robert, Lori, and
Swan Corporation under the following circumstances?
a. Swan Corporation distributes cash of $600,000 to Lori, and she uses the cash to purchase Robert’s shares.
b. Swan Corporation redeems all of Robert’s shares for $600,000.
54. LO.8, 9 The gross estate of Raul, decedent, includes stock in Iris Corporation (E & P of $3 million) valued at $2.5 million. At the time of his death, Raul owned
60% of the Iris stock outstanding, and he had a basis of $420,000 in the stock. The death taxes and funeral and administration expenses related to Raul’s estate amount to $1 million, and the adjusted gross estate is $7 million. The remainder of the Iris stock is owned by Monica, Raul’s daughter and sole heir of his estate. What are the tax consequences to Raul’s estate if Iris Corporation distributes $2.5 million to the estate in redemption of all of its stock in the corporation?
55. LO.8, 9 Broadbill Corporation (E & P of $650,000) has 1,000 shares of common stock outstanding. The shares are owned by the following individuals:
Tammy, 300 shares; Yvette, 400 shares; and Jeremy, 300 shares. Each of the shareholders paid $50 per share for the Broadbill stock four years ago. In the current year, Broadbill Corporation distributes $75,000 to Tammy in redemption of 150 of her shares. Determine the tax consequences of the redemption to Tammy and to
Broadbill under the following independent circumstances.
a. Tammy and Jeremy are grandmother and grandson.
b. The three shareholders are siblings.
56. LO.9 Crane Corporation has 2,000 shares of stock outstanding. It redeems 500 shares for $370,000 when it has paid-in capital of $300,000 and E & P of $1.2 million. The redemption qualifies for sale or exchange treatment for the shareholder.
Crane incurred $13,000 of accounting and legal fees in connection with the redemption transaction and $18,500 of interest expense on debt incurred to finance the redemption. What is the effect of the distribution on Crane Corporation’s E & P?
Also, what is the proper tax treatment of the redemption expenditures? Prepare a letter to the president of Crane Corporation (506 Wall Street, Winona, MN 55987) and a memo for the file in which you explain your conclusions.