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Chapter 06 Solutions

Chapter 06 Solutions - ChapterSix ProblemSolutions 20...

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Chapter Six Problem Solutions 20. Corporate distributions in redemption of stock are governed under § 311. Under that provision, gains, but not losses, are recognized on the distribution of noncash property when the property’s fair market value differs from its basis. As such, the distribution of Property A would result in a $12,000 disallowed loss [$50,000 (fair market value) – $62,000 (basis)] to Indigo. The distribution of Property B would result in a $14,000 recognized gain [$50,000 (fair market value) – $36,000 (basis)]. Indigo could distribute the cash, as neither gain nor loss is recognized by Indigo on a cash distribution. However, a sale of Property A to recognize the $12,000 loss and a distribution of the sales proceeds to Linda produces more favorable results. (To avoid the loss disallowance rules of § 267, the sale must not be to a related party.) pp. 6-11 and 6-12 24. Under § 304, when a shareholder sells stock she owns in one cor- poration to a related corporation, the sale is treated as a redemption subject to §§ 302 and 303. Assuming adequate E & P, the typical result is dividend income treatment on the distribution to the shareholder. Two corporations are related if the shareholder owns (directly or indirectly) 50% or more of both corporations. Thus, it appears that Sally has not achieved her goal of sale or exchange treatment. p. 6-15 28. The built-in loss limitation applies to the distribution, exchange, or sale of property that was acquired by the liquidating corporation in a § 351 or contribution to capital transaction and such acquisition was part of a plan whose principal purpose was to recognize the loss by the corporation. The limitation disallows the recognition of loss in such dispositions to the extent of the excess of the basis of the property over the fair market value of the property on the date of its transfer to the corporation, with consideration given to the basis step-down rules of § 362(e)(2) (see Chapter 4). Dispositions of built-in loss property within 2 years of its acquisition by the liquidating corporation are presumed to have been acquired by the corporation for a tax avoidance purpose. This presumption of tax avoidance can be rebutted if there was an adequate business reason for the transfer to the corporation. pp. 6-20 and 6-21 29. The general rule under § 331 provides for sale or exchange treatment to the shareholder. The shareholder is treated as having sold his or her stock to the corporation being liquidated. Thus, the difference between the fair market value of the assets received from the corporation and the adjusted basis of the stock surrendered is the gain or loss recognized. Typically, the stock is a capital asset in the hands of the shareholder and capital gain or loss results. The basis of property received in a liquidation is Page 1 of 9
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the property’s fair market value on the date of the distribution.
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