Chapter 6

1.
During the current year, Goldfinch Corporation purchased 100% of the stock of Dove Corporation
and made a qualified election under § 338. Which of the following statements is incorrect with
respect to the § 338 election?

A) If Dove is liquidated, Goldfinch will have a basis in the assets received equal to Dove’s
basis in the assets.

B) Goldfinch is treated as having bought all of Dove’s assets on the qualified stock purchase
date.

C) Dove is treated as a new corporation as of the day following the qualified stock purchase
date.

D) None of the above.

E) Dove can recognize gain or loss as a result of the § 338 election.

Points Earned: 12.5/12.5

Correct Answer(s): B

2.
Canary Corporation has 1,000 shares of stock outstanding. It redeems in a qualifying stock
redemption 200 shares for $200,000 at a time when it has paid-in capital of $100,000 and E & P
of $800,000. What would be the charge to Canary’s E & P as a result of the redemption?

A) $20,000.

B) $160,000.

C) $0.

D) $200,000.

E) None of the above.

Points Earned: 12.5/12.5

Correct Answer(s): B

3.
Yellow Corporation transfers land (basis of $210,000, fair market value of $300,000) to Joe, a
shareholder, to carry out a qualifying stock redemption. The land is distributed subject to a
$320,000 liability. With respect to the redemption:

A) Yellow Corporation will recognize a gain of $20,000.

B) Yellow Corporation will not recognize a gain.

C) None of the above.

D) Yellow Corporation will recognize a gain of $110,000.

E) Yellow Corporation will recognize a gain of $90,000.

Points Earned: 12.5/12.5

Correct Answer(s): D

4.
One advantage of acquiring a corporation via a stock purchase instead of an asset purchase is
that a stock purchase avoids the transfer of the acquired corporation’s liabilities.

A) True

B) False

Points Earned: 12.5/12.5

Correct Answer(s): False

5.
Domingo and Juan, brothers, each own 300 shares in White Corporation (E & P of $700,000).
Heron Partnership owns the remaining 400 shares of stock in White Corporation, and Juan has a
25% interest in Heron Partnership. White Corporation redeems 200 shares of Juan’s stock for
$120,000. Juan paid $150 a share for the stock five years ago. With respect to the redemption:

A) None of the above.

B) Juan has dividend income of $90,000.

C) Juan has dividend income of $120,000.

D) Juan has a long-term capital gain of $120,000.

 E) Juan has a long-term capital gain of $90,000.

Points Earned: 12.5/12.5

Correct Answer(s): E

6.
Crow Corporation has 800 shares of stock outstanding. Ted owns 300 shares, Ted’s mother
owns 100 shares, Ted’s sister owns 80 shares, and Ted’s granddaughter owns 120 shares.
Bluebird Corporation owns the remaining 200 shares of stock in Crow. Ted owns 30% of the
stock in Bluebird Corporation. In applying the § 318 stock attribution rules, how many shares
does Ted own in Crow Corporation?

A) 300.

B) 400.

C) 520.

D) None of the above.

E) 550.

Points Earned: 12.5/12.5

Correct Answer(s): C

7.
Hazel, Emily, and Frank, unrelated individuals, own all of the stock in Wren Corporation (E & P of
$900,000) as follows: Hazel, 250 shares; Emily, 250 shares; and Frank, 1,000 shares. Wren
redeems 400 of Frank’s shares (basis of $40,000) for $200,000. With respect to the distribution
in redemption of the stock:

A) Frank has dividend income of $160,000.

B) None of the above.

C) Frank has a capital gain of $160,000.

D) Frank has dividend income of $200,000.

E) Frank has a capital gain of $200,000.

Points Earned: 12.5/12.5
Correct Answer(s): D

8.
During the current year, Ecru Corporation is liquidated and distributes its only asset, land, to
Kena, the sole shareholder. On the date of distribution, the land has a basis of $300,000, a fair
market value of $650,000, and is subject to a liability of $400,000. Kena, who takes the land
subject to the liability, has a basis of $75,000 in the Ecru stock. With respect to the distribution
of the land, which of the following statements is correct?

A) Kena has a basis of $300,000 in the land.

B) Kena recognizes a gain of $175,000.

C) Kena recognizes a gain of $575,000.

D) Ecru Corporation recognizes a gain of $100,000.

E) Kena has a basis of $250,000 in the land.

Points Earned: 12.5/12.5

Correct Answer(s): B

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1.
On April 7, 2009, Crow Corporation acquired land in a transaction that qualified under § 351. The
land had a basis of $480,000 to the contributing shareholder and a fair market value of
$350,000. Assume that the shareholder also transferred equipment (basis of $50,000, fair
market value of $200,000) in the same § 351 exchange. Crow Corporation adopted a plan of
liquidation on October 6, 2010. On December 8, 2010, Crow Corporation distributes the land to
Ali, a shareholder who owns 20% of the stock in Crow Corporation. The land’s fair market value
was $300,000 on the date of the distribution to Ali. Crow Corporation acquired the land to use as
security for a loan it had hoped to obtain from a local bank. In negotiating with the bank for a
loan, the bank required the additional capital investment as a condition of its making a loan to
Crow Corporation. How much loss can Crow Corporation recognize on the distribution of the
land?

A) $50,000.

B) $0.

C) None of the above.

 D) $230,000.

E) $180,000.

Points Earned: 12.5/12.5

Correct Answer(s): E

2.
Penguin Corporation purchased bonds (basis of $95,000) of its 100% owned subsidiary, Finch
Corporation, at a discount. Pursuant to a § 332 liquidation and in satisfaction of the
indebtedness, Finch distributes land worth $100,000 (basis of $110,000) to Penguin. Which of
the following statements is correct with respect to the distribution of land?

A) Finch recognizes no loss and Penguin recognizes a gain of $5,000.

B) Neither Finch nor Penguin recognize gain (or loss).

C) None of the above.

D) Finch recognizes a loss of $10,000 and Penguin recognizes no gain.

E) Finch recognizes a loss of $10,000 and Penguin recognizes a gain of $5,000.

Points Earned: 12.5/12.5

Correct Answer(s): A

3.
Brenda owns 900 shares of Eagle Corporation stock at a time when Eagle has 1,500 shares of
stock outstanding. The remaining shareholders are unrelated to Brenda. What is the minimum
number of shares Eagle must redeem from Brenda so that the transaction will qualify as a
disproportionate redemption?

A) 720 shares.

B) 375 shares.

C) 180 shares.

D) 347 shares.
 E) None of the above.

Points Earned: 12.5/12.5

Correct Answer(s): D

4.
Skylark Corporation owns 90% of the outstanding stock of Quail Corporation, having purchased
the stock five years ago for $550,000. Pursuant to a plan of liquidation adopted by Quail
Corporation on March 4, 2010, Quail distributes all its property on December 1, 2010, to its
shareholders. Quail Corporation had never been insolvent and had E & P of $830,000 on the date
of liquidation. Pursuant to the liquidation, Quail distributed property worth $690,000 (basis
$580,000) to Skylark Corporation. How much gain must the parties recognize in 2010 on the
transfer of this property to Skylark Corporation?

A) None of the above.

B) $30,000 as to Skylark and $110,000 as to Quail.

C) $140,000 as to Skylark and $110,000 as to Quail.

D) $140,000 as to Skylark and $0 as to Quail.

E) $0 as to Skylark and $110,000 as to Quail.

Points Earned: 12.5/12.5

Correct Answer(s): A

5.
The adjusted gross estate of Keith, decedent, is $5 million. Included in the gross estate is stock
in Gold Corporation (E & P of $900,000), a closely held corporation, valued at $1.8 million as of
the date of Keith’s death in 2009. Keith had acquired the stock twelve years ago at a cost of
$300,000. Death taxes and funeral and administration expenses for Keith’s estate are $900,000.
Gold Corporation redeems one-half of the stock from Keith’s estate in a § 303 redemption to
pay death taxes using property with a fair market value of $900,000 (adjusted basis of
$550,000). Which of the following is a correct statement regarding the tax consequences of this
redemption?

A) The estate will recognize a $750,000 long-term capital gain on the redemption.

B) The estate will have a basis of $900,000 in the property received from Gold Corporation
in redemption of the estate’s stock.
 C) Gold Corporation will recognize no gain on the distribution of the property to Keith’s
estate.

D) None of the above.

E) Gold Corporation will not reduce its E & P as a result of the distribution of the property to
Keith’s estate.

Points Earned: 12.5/12.5

Correct Answer(s): B

6.
Which of the following statements is correct with respect to a partial liquidation?

A) The genuine contraction of a corporate business requirement is a subjective test that

taxpayers cannot rely upon with certainty.

B) A stock redemption pursuant to a partial liquidation cannot be pro rata with respect to the
shareholders.

C) The distribution of proceeds from the sale of marketable securities (held for investment)
to shareholders in exchange for part of their stock will satisfy the not essentially equivalent to a
dividend test.

D) None of the above.

E) The termination of a business test requires that the distributing corporation actively
conducted at least three trades or businesses for at least five years.

Points Earned: 12.5/12.5

Correct Answer(s): A

7.
Domingo and Juan, brothers, each own 300 shares in White Corporation (E & P of $700,000).
Heron Partnership owns the remaining 400 shares of stock in White Corporation, and Juan has a
25% interest in Heron Partnership. White Corporation redeems 200 shares of Juan’s stock for
$120,000. Juan paid $150 a share for the stock five years ago. With respect to the redemption:

A) Juan has dividend income of $120,000.

B) None of the above.

 C) Juan has a long-term capital gain of $90,000.

D) Juan has dividend income of $90,000.

E) Juan has a long-term capital gain of $120,000.

Points Earned: 12.5/12.5

Correct Answer(s): C

8.
If a liquidation qualifies under § 332, any minority shareholder will recognize gain (but not loss)
equal to the difference between the fair market value of assets received and the basis of the
shareholder’s stock.

A) True

B) False

Points Earned: 12.5/12.5

Correct Answer(s): False

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