Stock Redemptions in Terms of the Basics, Constructive Ownership, and Partial Liquidations

Redemptions of Stock - Basics (1)   Carol owns 4,000 shares of the stock of ABC Corporation.  In 2019, in exchange for some of her shares, Carol receives a check for $400,000.  Her basis in her entire interest in ABC Corp was equal to $1,000,000, and her adjusted basis of the exchanged shares is equal to $250,000.  ABC had $1,200,000 of Earnings & Profits as of the end of the 2019 tax year.  In 2018, Carol sustained stock market losses equal to $175,000 and has a LTCL carryover to 2019 equal to $172,000. (a)    Assuming she has no other items of income or loss in 2019 and does not itemized her deductions, what are the tax consequences to Carol if the redemption of her shares does not qualify for sale or exchange treatment under §302? (b)   Assuming she has no other items of income or loss in 2019 and does not itemized her deductions, what are the tax consequences to Carol if the redemption of her shares does qualify for sale or exchange treatment under §302? (2)   DEF Corporation has 10,000 shares of voting common stock outstanding.  Ann owns 7,000 shares and Ben owns 3,000 shares.  Ann and Ben attended the same college, but they are not related.  Which of the following transactions would constitute a redemption satisfying the requirements of §302(a): (a)    DEF Corporation acquires 3,200 shares from Ann (b)   DEF  Corporation acquires 4,000 shares from Ann (c) DEF Corporation acquires 1,000 shares from Ben. (d)   DEF Corporation acquires 5,100 shares from Ann and 1,000 shares from Ben at the same time. (e)    Assume that DEF acquired 4,200 shares from Ann and nine (9) months later redeemed 1,800 shares from Ben. (3)   XYZ Corporation redeems a portion of its stock owned by one of its shareholders, Black.  The corporation redeems Black's shares by distributing to him a parcel of real property with a FMV of $420,000 and an adjusted basis in the hands of XYZ Corporation of $245,000. What is the amount of gain, if any; XYZ Corporation will recognize that under the following circumstances?(a)    The redemption fails to satisfy any of the tests of §302(b) and therefore fails to fit within the provisions of §302(a) and is required to be tested under §301? (b)   The redemption satisfies the test set forth in §302(b)(2) and therefore does fit within the provisions of §302(a). (4)   Two unrelated individuals, Aaron & Burr, own the stock of ABC Corporation.  ABC redeems all of Aaron's stock in a transaction that fits within the provisions of §302(a).  ABC had earnings and profits equal to $80,000.  The corporation’s assets have a fair market value equal to $400,000 and liabilities equal to $280,000.  (a)    What is the proper amount, if any, of the reduction of ABC’s earnings and profits if Aaron received a $60,000 check in exchange for her ABC stock? (b)   What is the proper amount, if any, of the reduction of ABC’s earnings and profits if the corporation’s assets were worth $340,000, and Aaron received $30,000 in exchange for his X Corporation stock? Redemptions of Stock – Constructive Ownership (5)   XYZ Corporation has 10,000 shares of voting common stock outstanding.  The shares of XYZ are owned as follows:  3,000 shares owned by Art (Wendy's husband) 3,000 shares owned by Wendy (Art's wife) 2,000 shares owned by Diana (Art/Wendy’s daughter) 1,000 shares owned by Sam (Art/Wendy’s son) 1,000 shares owned by Greg (Sam's son) (a)  What is the percentage ownership interest of Art and his fellow shareholders taking into consideration §318 (the constructive ownership rules) (b)  What are the consequences to Diana and Greg if XYZ Corporation redeems six (6) shares of stock from each of them?  That is, will the redemptions qualify for sale or exchange treatment under § 302(a)? (c)  What are the consequences to Diana if XYZ Corporation redeems all of her shares of stock from her?  That is, will that redemption qualify for sale or exchange treatment under § 302(a)? (6)   QRS Corporation has 10,000 shares of voting common stock outstanding.  The shares of QRS are owned as follows:  3,000 shares owned by Adam, 2,000 shares owned by Peggy, 5,000 shares owned by the APM partnership. The APM partnership is owned, thirty (30) percent by Adam, thirty (30) percent by Peggy and forty (40) percent by Marty. (a) What is the percentage ownership interest of Adam, Peggy and the APM partnership taking into consideration §318 (the constructive ownership rules) (b)  What are the consequences to Adam and Peggy if QRS Corporation redeems 1,500 shares of stock from each of them? That is, will the redemptions qualify for sale or exchange treatment under §302(a)? (c) What are the consequences to the APM partnership if QRS Corporation redeems all of its stock?  That is, will that redemption qualify for sale or exchange treatment under § 302(a)? (7)   ABC Corporation has 10,000 shares of voting common stock outstanding.  The shares of ABC are owned as follows: 3,000 shares owned by Arnold 2,800 shares owned by Caryn 4,200 shares owned by PRS Corp. The stock of PRS Corp is owned as follows, 500 shares by Arnold, 490 shares by Caryn and 10 shares by her brother, Jerome.  Arnold and Caryn are not related. (a)What is the percentage ownership interest of Arnold, Caryn and PRS Corp taking into consideration §318 (the constructive ownership rules) (b) What are the consequences to Arnold and Caryn if ABC Corporation redeems 1,500 shares of stock from each of them?  That is, will the redemptions qualify for sale or exchange treatment under § 302(a)? (c) What are the consequences to PRS Corp if ABC Corporation redeems all of its stock and 1,900 shares of Caryn’s stock?  That is, will the redemptions qualify for sale or exchange treatment under § 302(a)? Redemptions of Stock Partial Liquidations & Section 303 (8)   XYZ Corporation operates multiple divisions each of which operates a separate and distinct business line.  On June 1, 2019, it distributes the assets of its retail shoe division to Adams, its sole shareholder.  The retail shoe division represented 10% of the net fair market value of XYZ Corporation.  It has been in operation since 2011 and was the last division established by XYZ Corporation. Following the distribution, XYZ Corporation continued to operate three other divisions each of which was responsible for a different business activity. The net fair market value of the assets of the retail shoe division were $1,000,000.  Adams' basis in his X Corporation stock was $3,500,000.  Will the redemption qualify for sale or exchange treatment under § 302(a)? (9)   ABC Corporation is a manufacturer of small appliances.  That is its only line of business. ABC Corporation had two factories.  A fire destroys one of the factories.  The factory destroyed by the fire accounted for 20% of ABC Corporation's gross revenue, 25% of ABC Corporation's employees and the factory’s net fair market value was 20% of ABC Corporation's total net fair market value.  ABC Corporation received insurance proceeds of $1,000,000.  Rather than rebuilding the plant, ABC Corporation discharges its employees and distributes the $1,000,000 to Adams, its sole shareholder.  (a)  Will the redemption qualify for sale or exchange treatment under § 302(a)? (b)   What would your answer to part (a) be if ABC Corporation had merely sold the factory rather than it having been destroyed by a fire? (10)  At the time of his death, Barney owned 60 percent of Orange Corporation, a closely held corporation.  His interest in Orange was valued at $3,500,000 and his basis in his shares was equal to $1,600,000.  Funeral and administration expenses totaled $400,000.  His other unpaid obligations were equal to $1,500,000.  The balance of Barney’s estate consisted of real property and publicly traded stock valued at $8,000,000.   These assets and the Orange stock comprised Barney’s gross estate.  Federal and state estate and inheritance taxes imposed on Barney’s estate were equal to $2,200,000. (a)  If the corporation redeemed $2,600,000 of Orange stock, how would that redemption be treated for federal income tax purposes? (b)  How would your answer to part (a) change if the corporation redeemed all of Barney’s interest in Orange Corporation? (c)    How would your answer to part (a) change if the total value of Barney’s interest in Orange Corporation was equal to $2,600,000?