Вы находитесь на странице: 1из 9

CHAPTER 4

92) Peter owns all 100 shares of Parker Corporation's stock. His basis in the stock is $30,000. Parker
Corporation has $300,000 of E&P. Parker Corporation redeems 25 of Peter's shares for $90,000. What are
the consequences to Peter and to Parker Corporation?
Answer: Since Peter still owns 100% of Parker Corporation's stock, the redemption is treated as a
dividend. Peter has a $90,000 dividend taxed at a maximum of 15%. His basis in his remaining 75 shares
remains at $30,000. Parker Corporation's E&P is reduced by $90,000.
Page Ref.: C:4-16 through C:4-18 Objective: 5

94) Dave, Erica, and Faye are all unrelated. Each has owned 100 shares of News Corporation stock for
five years and each has a $180,000 basis in those 100 shares. News Corporation's E&P is $720,000. News
redeems all 100 of Dave's shares for $300,000, their FMV.
a) What is the amount and character of Dave's recognized gain or loss? What basis do Erica and Faye
have in their remaining shares? What effect does the redemption have on News's E&P?
b) Assuming instead that Dave is Erica's son, answer the questions in part (a) again.
Answer:

a) This is a complete termination of interest and therefore Sec. 302(b)(3) applies. Dave recognizes a gain
of $120,000 ($300,000 - $180,000 basis). Erica and Faye each retain a basis of $180,000 in their shares.
News's E&P is reduced by $240,000 [(100/300 shares) $720,000].
b) If Erica is Dave's mother and a waiver of the family attribution rules is not elected, Dave is considered
to own 200/300 or 66 2/3% before the redemption and 100/200 or 50% after the redemption. Therefore,
the redemption is treated as a dividend of $300,000 to Dave. Erica's $180,000 basis is increased by Dave's
$180,000 basis in the shares surrendered to $360,000. Faye's basis remains the same at $180,000. News's
E&P is reduced by $300,000, the amount of the dividend paid to Dave.
Alternatively, Dave could elect under Sec. 302(c) to waive the family attribution rules. If such an election
is made, the Sec. 302(b)(3) rules that applied in determining the answer in part (a) will provide capital
gain treatment.
Page Ref.: C:4-21 through C:4-23 Objective: 5

96) Susan owns 150 of the 200 outstanding shares of Parent Corporation's stock. Parent owns 160 of the
200 outstanding shares of Subsidiary Corporation's stock. Susan sells 50 shares of her Parent stock to
Subsidiary for $40,000. Susan's basis in her Parent shares is $15,000 ($100 per share). Subsidiary
Corporation and Parent Corporation have E&P of $60,000 and $25,000, respectively, at the end of the
year in which the redemption occurs.
a)What is the amount and character of Susan's gain or loss on the sale?
b) What is Susan's basis in her remaining shares of Parent stock?
c) How does the sale affect the E&P of Parent and Subsidiary Corporations?
d) What basis does Subsidiary Corporation take in the Parent shares it purchases?
e) How would your answer to Part (a) change if Susan instead sells 100 of her Parent shares to Subsidiary
Corporation for $80,000?
Answer:
a) The sale is recast as a redemption. Since Susan still owns more than 50% of Parent after the
redemption, [100 shares directly and 20 (50% 80% 50) shares indirectly out of 200 outstanding
shares], or 60% of Parent's stock, the $40,000 is taxed as a dividend to Susan.
b) Susan's basis in her remaining 100 shares of Parent stock is $15,000.
c) Subsidiary Corporation's E&P is reduced to $20,000 ($60,000 - $40,000).
d) Subsidiary Corporation's basis in the Parent shares is $40,000.
e) The recast redemption is substantially disproportionate {75% before the redemption and 70 [50 + 20
(25% 80% 100)] shares, or 35%, after the redemption}. Therefore, Susan has a capital gain of
$70,000 [$80,000 - (100/150 $15,000)].
Page Ref.: C:4-30 through C:4-33 Objective: 7

97) Rich owns 60 of the 100 outstanding shares of Rainbow Corporation's stock and 80 of the 100
outstanding shares of Oz Corporation's stock. Rich's basis in his Rainbow shares is $12,000, and his basis
in his Oz shares is $8,000. Rich sells 30 of his Rainbow shares to Oz Corporation for $50,000. At the end
of the year of the sale, Rainbow and Oz Corporations have E&Ps of $25,000 and $40,000, respectively.
a) What is the amount and character of Rich's gain or loss?
b) What is Rich's basis in his remaining shares of the Rainbow and Oz stock?
c) How does the sale affect the E&Ps of Rainbow and Oz Corporations?
d) What basis does Oz Corporation take in the Rainbow shares it purchases?
e) How would your answer to part (a) change if Rich owns only 50 shares of the 100 outstanding shares
of Oz Stock?
Answer:
a) The sale is recast as a redemption of Oz stock issued as a result of Rich's capital contribution of the
Rainbow stock to Oz. The Sec. 302 stock ownership is tested by looking at Rich's ownership of the
Rainbow stock.
Rich's ownership of Rainbow stock before the redemption: 60% of Rainbow stock.
Rich's ownership after the redemption: 30 shares directly and 80% x 30 shares indirectly = 54 shares =
54% of Rainbow stock.
The redemption is treated as a $50,000 dividend to Rich since the combined E&P of Rainbow and Oz
Corporations is $65,000 ($25,000 + $40,000).
b) Rich's basis in his remaining Rainbow stock is $6,000 (30/60 $12,000). Rich's basis in his Oz stock is
increased to $14,000 by his $6,000 basis in the redeemed Oz stock.
c) Oz's E&P is reduced by the first $40,000 of the distribution, and Rainbow's E&P is reduced by the
remaining $10,000 ($50,000 - $40,000) of the distribution.
d) Oz's basis in its Rainbow shares is $6,000, the same as Rich's pre-sale basis.
e) If Rich owned only 50% of the Oz stock before the sale, Rich owns 60% of the Rainbow stock before
and 45% after the sale [30 shares + (50% x 30 shares)], so the redemption is treated as a sale under Sec.
302(b)(2). Rich has a capital gain of $44,000 ($50,000 - $6,000 basis).
Page Ref.: C:4-31 through C:4-33 Objective: 7

CHAPTER 9
104) Victor and Kristina decide to form VK Partnership. They will be equal partners.
Victor contributes a building with a $150,000 FMV and a $105,000 adjusted basis to
the partnership. The building has a $60,000 mortgage, which the partnership assum
es. Kristina contributes land with a $70,000 FMV and a $95,000 adjusted basis. Krist
ina will manage the day-to-day activities of the partnership. She will begin to receiv
e a guaranteed payment for her work, starting in the second year of operations, and
continuing on as long as she manages the operations of the partnership. Victor and
Kristina have agreed that the guaranteed payment will be $10,000 per year. What t
ax issues should Victor, Kristina, and the partnership consider with respect to the for
mation and operation of the partnership?
Answer:
Does Victor recognize any gain on the formation? When will his precontribution gai
n be recognized?
What is Victor's basis and holding period for his partnership interest?
Does Kristina recognize any loss on the contribution of property in exchange for he
r partnership interest? When will her precontribution loss be recognized? What will t
he character of the loss be?
What is Kristina's basis and holding period for the partnership interest she received
in exchange for
property?
What basis and holding period does the partnership have in the property received?
What happens to the depreciation recapture for the building?
Did Kristina receive any of her partnership interest for services?
If so, what gain/loss/deductions must the partnership recognize?
What income must Kristina recognize?

Victor must determine his basis in the partnership interest ($75,000 = $105,000 - $
60,000 + $30,000 share of liabilities) and his holding period for his interest in the pa
rtnership (begins with his ownership of the office building). Since Victor recognizes n
o gain or loss, he does not have to be concerned with any recapture potential under
Sec. 1250. Victor will have to recognize precontribution gain on the office building at
a future date.
Kristina must determine her basis in the partnership interest ($125,000 = $95,000
+ $30,000 share of liabilities) and her holding period for her interest in the partners
hip (begins with her ownership of the land). Kristina recognizes no loss at the time o
f the partnership formation. If the land was a capital asset to Kristina and the land is
sold by the partnership within five years of Kristina's contribution, the loss will be a

capital loss up to $25,000, and that capital loss will be allocated to Kristina as a prec
ontribution loss.
After five years, the character of the loss will be determined by the character of the
land to the partnership, but Kristina will still have to report any precontribution loss.
Guaranteed payments will be reported as ordinary income.
The partnership must be concerned with the basis and holding period of the assets i
t receives (carryover for both basis and holding period). The partnership can deduct
from ordinary income the guaranteed payments made to Kristina.
An additional tax issue must be addressed. Victor contributed property with a net va
lue of $90,000 for a one-half interest in the partnership, while Kristina contributed p
roperty with a net value of only $70,000 for a one-half interest in the same partners
hip. The total partnership has a net value of $160,000 ($150,000 + $70,000 - $60,0
00 liability). There must be some explanation. One possibility is that Bob has made
a $10,000 gift to Kristina. If this is so, both partners' bases must be adjusted to refle
ct the gift. Alternatively, the facts suggest that Kristina may be receiving some of he
r partnership interest in exchange for her services in managing the business for the
first year while receiving no guaranteed payment. If this is so,
Kristina must recognize ordinary income and increase her basis for the value of the
partnership interest she received in exchange for services. If Kristina is receiving so
me of her partnership interest for service, the partnership must recognize a gain or l
oss in the partnership assets she is deemed to receive and must
adjust the basis of the assets for her deemed re-contribution. The partnership also
must deduct the guaranteed payment.
Page Ref.: C:9-5 through C:9-12
Objective: 1

HOMEWORK