Note: Assume in all problems that section 305(b) does not apply.
2)A and B organized X 15 years ago, each contributing $10,000 and each receiving 100 shares of common stock. Five years ago in June, X declared a one-for-one dividend payable in pure preferred stock (paying a 6 percent cumulative dividend on its par value, which equaled itsthen$100 of FMV). The value of common stock after the distribution was $400 per share. In that year, X had accumulated E&P of $13,000 and current E&P of $3,000. In the current year, X has accumulated E&P of $28,000 and current E&P of $2,000. What are the tax consequences of the disposition described in each situation below?
a.)In December of the current year, A sells all of A’s preferred stock to C for $9,000; In June of the next year, A sell all A’s common stock to D for $50,000.
Alternatives:
I.The sales to D took place in June of the current year. Also, what if C were A’s son?II.Same as (i) above except that A sells the preferred back to X.III.X was an S Corporation five yearsago,with a $20,000 AAA in addition to the $13,000 accumulated E&P but no current E&P.
b.)B, who is A’s son, took over as X’s CEO five years ago. A gave 100 common shares of X to B four years ago.A dies on December 1 of the current year when the preferred stock is worth $9,000.No election is made under Section 2032. In March of the next year, A’s executor sells the preferred for $10,000.
c.)In December of the current year, X redeems all of A’s preferred stock in exchange for $9,000. In the next year, X redeems all of B’s preferred stock for $9,000; X’s available E&P next year is $1,000, before reduction for distributions.
Regs: Section 1.305-5(b)
7B)Assumptions: X has ample E&P, X regularly pays annual cash dividends on all stock, and X pays interest on any outstanding debt each year. In problems involving two classes of stock outstanding, the two classes are not held in the same proportions by the shareholders. Determine for each problem the tax results to all affected shareholders and to X.
1.)X issues to C, for $100 per share, X preferred stock that the owner can put back to X for $150 per share in five years.
a.)In addition: X can, but is not required to, call the stock for redemption at $150 at any time.
Alternative:
b.)the shareholder has no put although X can, but is not requiredto,call the stock at $150 after five years
8A)Assumptions for problem: X owns a rental building (its only asset) with a gross FMV of $1,000, subject to a nonrecourse mortgage of $400. X’s adjusted basis for the building is $300. A owns all of X’s stock, with a total basis of $100. X has $200 of E&P. X is on the accrual method of accounting and reports on the calendar year. Assume that the corporate tax payable by X on $700 gain is $250 and on $600 gain is $200.
For the following problem, determine the amounts and character of realized and recognized gain or loss to all parties, the time of recognition, and the transferee’s basis in any property received in kind.
1.)X sells the building, subject to the mortgage, to B in the current year for $600 in cash. X then liquidated, distributing toAall of the cash remaining after paying its taxes, in cancellation of A’s stock in the current year.
a.)B pays $300 cash and gives B’s $300 note payable in equal annual installments over five years. X’s plan of liquidations provides that X will stay in existence for five years for sole purpose of collecting the note and paying the net amount over to A annually.