Question

46. Smith owns 750 shares of the total outstanding stock of 1,000 shares for Blue Company.

Her stock basis is $50,000. Smith, subsequently, sells 200 of her shares back to Blue      Company for $20,000. Blue Company has E & P of $80,000. Smith’s sale of her stock to

Blue Corporation will be treated as:

A) dividend income                

B) a sale transaction

C) a return of capital                  

D) some other treatment

47. Ally owns 25% of Raisman Corporation's single class of stock. Ally's basis in the stock is $12,000. Raisman's E&P is $32,000. If Raisman redeems all of Ally's stock for $28,000, Ally must report dividend income of

A) $40,000.

B) $30,000.

C) $20,000.

D) $0.                      

48. Identify which of the following statements is false.

A) The distribution of stock rights is generally tax free under Sec. 305.

B) The distribution of stock rights will be taxable if the value of the stock rights is more than 15% of the value of the underlying stock.

C) If the value of stock rights is less than 15% of the value of the underlying stock, the basis of the rights is zero unless the shareholder elects to allocate basis to the rights.

D) The holding period for stock rights includes the holding period for the underlying stock.

49. Selfie Corporation was formed three years ago. Selfie's E&P history is as follows:

Year	Current E&P	Distributions
2016 2017 2018	$10,000 7,000 2,000	$5,000 6,000 0

Poppy Corporation's accumulated E&P on January 1 will be

A) $0.

B) $7,000.

C) $8,000.

D) $12,000.

50. Uno Corporation distributes $25,000 to its sole shareholder, Aru. At the time of the distribution, Uno's E&P is $10,000 and Aru's basis in her stock is $12,000 (Aru’s stock has been held for 5 years). Aru's gain from this transaction is a

A) $3,000 ordinary income.

B) $3,000 capital gain.

C) $13,000 ordinary income.

D) $13,000 capital gain.

Answer 1

Part 46

Option B

B) a sale transaction

In a stock redemption, if the ownership percentage of a shareholder is reduced then it is treated as a sale transaction.

Part 47

D) $0

Dividend income is recognized when some proportion of stocks are redeemed. In case of redemption of all stocks, the dividend income is not recognized.

Part 48

Option B

The distribution of stock rights will be taxable if the value of the stock rights is more than 15% of the value of the underlying stock.

Part 49

Option C

$8000

Accumulated E&P = sum of current E&P for all prior years – distributions (if any)

Accumulated E&P = (10000-5000)+(7000-6000)+(2000-0) = $8000

Part 50

option B

$3,000 capital gain.

capital gain = distribution - E&P - stock basis

= 25000-10000-12000

= $3000