Question 1. At the time of her death, Janice owned (in terms of the value

1. At the time of her death, Janice owned (in terms of the value of the stock outstanding) the following stock: 18% of Dove Corporation and 21% of Hawk Corporation. The value of these stocks is included in Janice’s gross estate. For purposes of applying the 35% of the value of adjusted gross estate requirement under § 303 (i.e., redemption to pay death taxes), the Dove and Hawk stocks are aggregated.

a. True

b. False

2. Grackle Corporation (E & P of $600,000) distributes cash of $200,000 and land (fair market value of $400,000; basis of $250,000) to a shareholder in a qualifying stock redemption. The land distributed is subject to a mortgage of $460,000. Grackle will recognize a gain of $210,000 as a result of the distribution.

a. True

b. False

3. At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding, the corporation distributed $300,000 to redeem 400 shares of its stock. The transaction qualified as a disproportionate redemption for the shareholder. Blackbird’s E & P is reduced by $300,000 as a result of the distribution.

a. True

b. False

ANSWER: False

4. Tan Corporation paid interest expense on a debt incurred in financing a redemption of its stock. The interest expense is not deductible since it was incurred in connection with a stock redemption.

a. True

b. False

5. The tax treatment of corporate distributions at the shareholder level does not depend on:

a. The character of the property being distributed.

b. The earnings and profits of the corporation.

c. The basis of stock in the hands of the shareholder.

d. Whether the distributed property is received by an individual or a corporation.

e. None of the above.

6. Rose Corporation (a calendar year taxpayer) has taxable income of $300,000, and its financial records reflect the following for the year.

7. Tern Corporation, a cash basis taxpayer, has taxable income of $500,000 for the current year. Tern elected $100,000 of § 179 expense. It also had a related party loss of $20,000 and a realized (not recognized) gain from an involuntary conversion of $75,000. It paid Federal income tax of $150,000 and paid a nondeductible fine of $10,000. Tern’s current E & P is:

a. $400,000.

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