Chapter 20: 18, 23, 24, 27
Dover Corporation (E & P of $800,000 has 1,000 shares of stock outstanding. The shares are owned as follows: Julia, 600 shares; Maxine (Julia’s sister), 300 shares; and Janine (Julia’s daughter), 100 shares. Dover Corporation owns land (basis of $300,000, fair market value of $260,000) that is purchased as an investment seven years ago. Dove distributes the land to Julia in exchange for all her shares in the corporation. Julia had a basis of $275,000 in the shares. What are the tax consequences for both Dove Corporation and Julia if the distribution is:
a. a qualifying stock redemption?
b. A liquidating distribution?
4 Pink Corporation acquired land and securities in a § 351 tax-free exchange in 2012. On the date of the transfer, the land had a basis of $720,000 and a fair market value of $1 million, and the securities had a basis of $110,000 and a fair market value of $250,000. Pink Corporation has two shareholders, Maria and Paul, who are unrelated.
Maria owns 85% of the stock in the corporation, and Paul owns 15%. Pink adopts a plan of liquidation in 2013. On this date, the value of the land has decreased to $500,000. What is the effect of each of the following on Pink Corporation? Which option should be selected?
a. Distribute all of the land to Maria.
b. Distribute all of the land to Paul.
c. Distribute 85% of the land to Maria and 15% to Paul.
d. Distribute 50% of the land to Maria and 50% to Paul.
e. Sell the land and distribute the proceeds of $500,000 proportionately to Maria and to Paul.
Assume in Problem 23 that the land had a fair market value of $630,000 on the date of its transfer to the corporation. On the date of the liquidation, the land’s fair market value has decreased to $500,000. How would your answer to Problem 23 change if:
a. All of the land is distributed to Maria?
b. All of the land is distributed to Paul?
c. The land is distributed 85% to Maria and 15% to Paul?
d. The land is distributed 50% to Maria and 50% to Paul?
e. The land is sold and the proceeds of $500,000 are distributed proportionately to
Maria and to Paul?
The stock of Magenta Corporation is owned by Fuchsia Corporation (95%) and Marta (5%). Magenta is liquidated in the current year, pursuant to a plan of liquidation adopted earlier in the year. In the liquidation, Magenta distributes various assets worth $950,000 (basis of $620,000) to Fuchsia (basis of $700,000 in Magenta stock) and a parcel of land worth $50,000 (basis of $75,000) to Marta (basis of $30,000 in Magenta stock). Assuming that the § 338 election is not made, what are the tax consequences of the liquidation to Magenta, Fuchsia, and Marta?