FTax IRGTB ch20 p001-016 - 20 Corporate Distributions...

Corporate Distributions,
Redemptions, and Liquidations
Test Bank
True or False
1. A corporation ’ s accumulated E&P will equal its retained earnings.
2. It is possible for a corporation to pay a taxable dividend even though there is a deficit in accumulated
E&P.
3. Corporations can distribute appreciated land held for investment as a dividend without recognizing
any income.
4. Normally, a stock dividend is nontaxable as long as it does not change the proportionate interests of
the shareholders.
5. T was granted one right for each share of stock that she owned. She was required to allocate basis to
the stock rights. T was unwilling to exercise the rights to buy new stock because of the outlook for the
company, and consequently they lapsed. Despite her views on the company ’ s future, she continued to
hold her original stock. She is not allowed to deduct a loss equal to the basis assigned to the rights.
6. A shareholder must allocate a portion of the basis of stock owned to stock rights received as a
dividend when the rights are received.
7. A loss is deductible when stock rights acquired in a tax-free distribution are allowed to expire.
8. Stock redemptions cannot qualify as “ not essentially equivalent to a dividend. ”
9. A redemption of voting common stock that reduces a taxpayer ’ s ownership from 60 percent to
45 percent will qualify as a substantially disproportionate redemption.
10. A distribution in partial liquidation is not considered equivalent to a dividend if it is attributable to a
genuine contraction of the corporation ’ s business.
11. A corporation that has ceased operating one of its businesses can redeem stock from any shareholder
under the partial liquidation provision.
20
20-1

12. If a corporation is closely held, the stock attribution rules will prevent a stock redemption from
qualifying as a complete termination of ownership.
13. The stock attribution rules do not apply to redemptions that qualify as complete terminations of a
shareholder ’ s interest.
14. It is possible to recognize a capital gain on the sale of stock of a corporation that Taxpayer Z controls
to another corporation that Taxpayer Z controls.
15. As a general rule, shareholders recognize capital gains and losses on the complete liquidation of a
corporation.
16. Section 336 provides that a corporation will not recognize gain on a distribution in complete
liquidation.
17. Because the law treats a corporation as having sold its assets when it distributes them in complete
liquidation, the corporation will recognize solely capital gains and losses.
18. All losses on property distributed in a complete liquidation will be recognized by the corporation.
19. When a subsidiary is liquidated by its parent corporation, the basis of the assets transferred from the
subsidiary to the parent is determined by the amount of the parent ’ s investment in the subsidiary ’ s stock.