Corporate Tax Special Topics

Question 1

The corporation’s initial carryover basis in property exchanged by a control group shareholder for its stock is an adjusted carryover basis?

Answer 1

True, the corporation’s initial carryover basis in property exchanged by a control group shareholder for its stock is an adjusted carryover basis. The basis in property to the corporation equals the adjusted basis in property to the shareholder plus the gain recognized by the shareholder.

Question 2

A control group shareholder’s basis in the stock of the corporation is the adjusted basis in contributed property adjusted for the boot received and the gain recognized?

Answer 2

True, a control group shareholder’s basis in the stock of the corporation is the adjusted basis in contributed property adjusted for the boot received and the gain recognized.

Question 3

Section 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and, immediately after the exchange, such person or persons control the corporation?

Answer 3

Yes, Section 351 requires that no gain or loss be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in the corporation and, immediately after the exchange, such person or persons control the corporation. This nonrecognition treatment is mandatory, not elective. Control is ownership of 80% or more of the voting power of stock and 80% or more of the shares of each class of nonvoting stock of the corporation.

Question 4

The solely-for-stock requirement of Sec. 351 causes the entire transaction to be taxable if any non-stock property is received by the shareholder?

Answer 4

Yes, to the extent the shareholder receives the corporation’s stock in exchange for property, nonrecognition is required. This is so even if the shareholder receives some boot (money or other property) in the exchange.

Question 5

Earnings and profits (E&P) for tax purposes is identical to retained earnings for financial accounting?

Answer 5

No, though similar in purpose, they are not the same amount.

Question 6

Calculating current E&P starts with the current-year gross income and then makes various positive and negative adjustments?

Answer 6

No, the calculation starts with taxable income, not gross, and then makes various positive and negative adjustments.

Question 7

A corporation’s loss on a distribution is treated as a capital loss?

Answer 7

No, a distribution is any transfer of property by a corporation to any of its shareholders with respect to the shareholder’s shares in the corporation. No loss realized on an ordinary distribution of property (AB > FMV) may be recognized. The shareholder takes a FMV basis in the property.

Question 8

A corporation recognizes a gain on distributed property only when the shareholder subsequently sells the property?

Answer 8

No, gain realized on distributed property must be recognized by the corporation as if the property were sold to the distributee at its FMV. But no gain is recognized to the corporation on distribution of money or obligations it issues, e.g., bonds.

Question 9

The amount of a distribution is a dividend to the extent, first, of any current E&P and then, of any accumulated E&P?

Answer 9

Yes, the amount of a distribution is a dividend to the extent, first, of any current E&P and then, of any accumulated E&P. When distributions during the year exceed current E&P, pro rata portions of each distribution are deemed to be from current E&P. Treatment of a distribution is determined by reference to accumulated E&P only after any current E&P have been accounted for.

Question 10

Distributions that exceed current and accumulated E&P are capital gains to the shareholders?

Answer 10

No, a shareholder treats the amount of a distribution in excess of dividends as tax-exempt return of capital to the extent of his or her basis. Basis in the stock is reduced (but not below zero).

Question 11

Any excess of the amount of a distribution over E&P and basis is treated as gain on the sale of the stock?

Answer 11

Yes, any excess of the amount of a distribution over E&P and basis is treated as gain on the sale of the stock. Character depends on the nature of the stock in the hands of the shareholder as a capital asset or dealer property.

Question 12

Additional gain may be recognized by a shareholder who sells stock on which an extraordinary dividend was received?

Answer 12

Yes, additional gain may be recognized by a shareholder who sells stock on which an extraordinary dividend was received. An extraordinary dividend is a dividend on stock held 2 years or less that exceeds 10% (5% for preferred stock) of either the basis or the FMV of the stock.

Question 13

A corporation recognizes gain but not loss on a distribution of its own stock?

Answer 13

No, a corporation recognizes no gain or loss on distribution of its own stock. A proportionate distribution of stock issued by the corporation is generally not gross income to the shareholders.

Question 14

Basis in a stock acquired by exercising a stock right is the fair market value on the date the right was granted?

Answer 14

No, a distribution of stock rights is treated as a distribution of the stock. Basis in a stock acquired by exercising a stock right is any basis allocated to the right, plus the exercise price.

Question 15

All stock distributions are tax-free?

Answer 15

No, not all stock distributions are tax-free. The amount of a distribution subject to tax is the FMV of distributed stock or stock rights.

Question 16

Redemptions of stock by a corporation are treated as dividends unless certain conditions are met?

Answer 16

Yes, redemptions of stock by a corporation are treated as dividends unless certain conditions are met. If any of the following conditions are met, the exchange is treated as a sale, and the gains or losses are capital gains and losses: 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 noncorporate shareholder in partial liquidation; and, the distribution is received by an estate.

Question 17

The shareholder treats qualifying redemptions as if the shares redeemed were sold to a third party?

Answer 17

Yes, the shareholder treats qualifying redemptions as if the shares redeemed were sold to a third party. Gain or loss is any spread between AB of the shares and the FMV of property received. Character of gain or loss depends on the nature of the stock in the shareholder’s hands.

Question 18

Sale treatment on a redemption is granted on a termination, even if the shareholder maintains a 1% interest in the stock?

Answer 18

No, termination of a shareholder’s interest must be complete to qualify. All the stock owned, actually and through family attribution, by the shareholder in the corporation must be redeemed in the exchange for the property.

Question 19

A redemptions is substantially disproportionate when, immediately after the redemption, the shareholder owns less than 50% of the voting power of the outstanding stock and less than 80% each of the voting stock and common stock owned before the redemption?

Answer 19

Yes, A redemption is substantially disproportionate with respect to a shareholder if, immediately after the redemption, (s)he owns

1) Less than 50% of the voting power of the outstanding stock and
2) Less than 80% each of the
Voting stock (s)he owned before the redemption.
Common stock (s)he owned before the redemption.

Question 20

Not essentially equivalent to a dividend means that there is a meaningful reduction in the shareholder’s proportionate interest in the corporation?

Answer 20

Yes, not essentially equivalent to a dividend means that there is a meaningful reduction in the shareholder’s proportionate interest in the corporation. Reduction in voting power is generally required.

Question 21

A corporation recognizes gain but not loss in a complete liquidation?

Answer 21

No, under a plan of complete liquidation, a corporation redeems all of its stock in a series of distributions. A corporation recognizes any gain or loss realized on distributions in complete liquidation as if the property were sold at its FMV to the shareholder immediately before its distribution. Gain or loss is computed on an asset-by-asset basis.

Question 22

A shareholder treats amounts distributed in complete liquidation as realized in exchange for stock?

Answer 22

Yes, a shareholder treats amounts distributed in complete liquidation as realized in exchange for stock. Capital recovery to the extent of basis is permitted before recognizing gain or loss. Holding period will not include that of the liquidated corporation.

Question 23

A noncorporate shareholder treats a distribution as a sale to the extent it is (in redemption) in partial liquidation of the corporation?

Answer 23

Yes, a noncorporate shareholder treats a distribution as a sale to the extent it is (in redemption) in partial liquidation of the corporation. Partial liquidation refers to contraction of the corporation. Focus is not on the shareholders but on genuine reduction in size of the corporation.

Question 24

In a subsidiary liquidation, neither the parent corporation nor a controlled subsidiary recognizes gain or loss on a liquidating distribution to the parent?

Answer 24

Yes, in a subsidiary liquidation, neither the parent corporation nor a controlled subsidiary recognizes gain or loss on a liquidating distribution to the parent. Control means the parent owns 80% or more of both the voting power and total value of the stock of the liquidating corporation.

Question 25

For federal tax purposes, a qualified reorganization of one or more corporations is considered a mere change in form of investment rather than a disposition of assets?

Answer 25

Yes, for federal tax purposes, a qualified reorganization of one or more corporations is considered a mere change in form of investment rather than a disposition of assets. For this reason, a general rule of nonrecognition applies to qualifying reorganizations. However, gain is recognized to the extent of boot.

Question 26

A corporation that is a party to a reorganization must always recognize gain?

Answer 26

No, a corporation that is a party to a reorganization generally recognizes no gain or loss on exchange of property solely for stock or securities of another corporate party.

Question 27

A Type A reorganization is one in which stock of the acquiring company is exchanged solely for stock of the acquired company?

Answer 27

No, a Type A reorganization is a statutory merger or consolidation. Under state law, two corporations merge into one. Stock in the non-surviving corporation is canceled. In exchange, its shareholders receive stock in the surviving corporation. In a Type B reorganization, shareholders acquire stock of a corporation solely for part or all of the voting stock of the acquiring corporation or its parent.

Question 28

In a Type C reorganization, one corporation acquires substantially all the assets of another in exchange for its voting stock (or its parent’s)?

Answer 28

Yes, in a Type C reorganization, one corporation acquires substantially all the assets of another in exchange for its voting stock (or its parent’s). The transferor (sale of assets) corporation must liquidate. Only 20% of the assets acquired may be exchanged for other than voting stock of the acquiring corporation. “Substantially all assets” means greater than or equal to 90% of the FMV of net assets and greater than or equal to 70% of gross assets.

Question 29

In a Type D reorganization, the capital structure of a corporation is modified only?

Answer 29

No, in a Type D reorganization, a corporation transfers all or part of its assets to another in exchange for the other’s stock. In a Type E reorganization, the capital structure is modified by exchanges of stock and securities between the corporation and its shareholders.