Corporate Homework 5

P200
1.
A. Grandfather estate includes=25 (Directly owns)
=20 from grandfathers daughter
=15 from grandchild
=10 from adopted grandchild
=15 from grandmothers estate of which daughter is a beneficiary(30*50%)
Total=85 shares
B. Daughter
=15 of her own
=25 mothers shares (20 mother + 5 option )
=15 mothers estate
Total=55 shares
C. Grandmother
=30 of her own
=25 from spouse
=20 from daughter
=15 from granddaughter
=10 from grandson (adopted)
Total =100 shares
2.

A.
A owns 25 shares of xerxes.
W owns 25 shares ( family attribution of spouse)
M owns 0 shares ( family attribution doesnt apply to in laws)

B.
Stock owned by a 50% or more shareholder of a corporation is attributed to the
corporation.
W owns all of the shares of Yancy. And W owns 25 shares in Xerxes.
Thus Yancy owns 25 shares of Xerxes.
If W owned only 10% in Yancy then the rule of owning 50% value wouldnt apply
thus Yancy would own 0 shares.

C.
Partnership owns 100 shares of Yancy corp. A shares are reattributed to the
partnership.
The partners own no shares in Yancy. No side way attribution allowed.
Xerxes corp owns 100 shares of partnership.
P204
1. 302(b)(2)
a) It fails the requirement of 302(b)(2). Alices common stock ownership does not
change.
b) It fails the requirement of 302(b)(2). After redemption, Alice owns 20 shares
(=80 60) voting common, the total shares of voting common 40 (=100 60).
Alice owns 50% of total voting common. The code requires less than 50%
ownership.
c) It satisfies the requirement. After redemption, Alice owns less than 50% voting
common ((80-70)/(100-70)=10/30=33%); the percentage of voting common
after redemption (33%) is less than 80% of percentage of voting common
before (80%); total percentage after redemption (35/155 or 23%) is less than
80% of total percentage before (180/300 or 60%).
d) It depends on whether redemptions of two people are considered in
aggregation. If they are considered in aggregation, then it fails 302(b)(2). If not,
then Alices redemption qualifies. Although Alice and Cathy are not related, it
is possible to consider their redemptions as a series of redemptions under
section 302(b)(2)(D) if they are made pursuant to a plan.
2. It fails the requirement of 302(b)(2). After redemption, Don owns less than 50% of
voting common (30/70=42.9%); he also owns less than 80% of the value of voting
common owned before redemption (60%*0.8 = 48% > 42.9%). It fails the second
80% value test. Don owns 48.1% of the value of all common value (13,000/27,000),
which is more than 80% of the ownership percentage of all common value before
redemption, 42.6% (16,000/30,000=53.3%, 53.3%*0.8=42.6%).
P221
1. Randall Corporation, 302(b)(3)
a) It qualifies 302(b)(3) with waiver of family attribution under 302(c)(2)
b) Alison cannot use 302(c)(2) due to failure of filing the agreement required by
302(c)(2)(A)(iii)
c) Alison cannot use 302(c)(2) waiver because she retains a forbidden interest
under 1.302-4(d)
d) The redemption of remaining 30 shares in year 2 qualifies under 302(b)(3). The
redemption of 20 shares in year 1 may receive redemption treatment if there
was a firm and fixed plan for the 2 redemptions.
e) Alison cannot use 302(c)(2) waiver because remaining a director is a prohibit
interest.
f) Alison cannot use 302(c)(2) waiver because becoming an employee is a
prohibited interest.
g) It qualifies 302(c)(2) waiver. 302(c)(2)(A)(ii) permits an acquisition of stock

within the proscribed 10-year period by bequest or inheritance.

2. B&B
a) The 30 share gift to Junior does not violate 302(c)(2)(B)(ii) unless there is a
principle purpose of tax avoidance. Betty and Billy will hold the 20-year note
as creditors, and thats permitted.
b) Consulting agreement might fail the 302(b)(3) under Lynch and R.R. 70-104.
3. Cinelab
a) It may qualify 302(c)(2) waiver. Both the Estate and Bella must satisfy the
conditions in 302(c)(2)(A) and Bella must agree to be liable for any deficiency
during the 10-year period following the date of the redemption.
b) It does not qualify 302(c)(2) waiver if redemption with estate.
c) It does not qualify 302(c)(2) waiver John and Marys stock is attributed to the
Estate.
d) The trust can obtain a 302(b)(3) complete redemption if Bella and the trust
enter waiver agreement. Nancy is not a related person under 318(a)(1).
e) It violates 10-year look forward rule.
P235
1. Z Corp
a) It fails 302(b)(2)(C)(ii) 80% test.
b) It satisfies 302(b)(1). The ownership before was 52%; after is 49.4%.
c) It fails 302(b)(2)(B) 50% test.
d) It does not change the result.
2. Y Corp
a) It does not qualify 302(b) treatment because no voting stock redeemed.
b) The redemption does not affect A. E gets 302(b)(3) safe harbor from complete
termination of interest. B should qualify for sale treatment under 302(b)(1). C
and D have minor impact, treated as dividend.
3. If five shares are redeemed in a transaction which is properly classified as a dividend
shareholders basis in remaining shares goes up to carry forward the outstanding
basis that was not recognized as a return to capital year. If 10 shares were redeemed
in a dividend transaction basis transfers to related party.
P240
a. Shareholders will be taxed on the 50 shares of redeemed shares. Actually
surrender of stock does not matter, partial liquidation still occurs.
b. If purchased with cash the results would be different. It would be a sale of an
investment.
c. Insurance proceeds are received pro rata and no tax consequence to shareholder.
d. Partial liquidation occurs.
e. distribution to iris corp does not qualify as partial liquidation.
f. Partial liquidation occurs.
g. Redemption of the 20 shares are partial liquidation.
h. Does not qualify because distributes assets to Betas business.

Problem 246
Pro rata portion of current earnings and profits ( 100,000*50%*50%) 25,000
Pro rata portion of total earnings and profits prior to current year ( 100,000*50%) 50,000
Excess of cash paid to redeem As share (250,000-25,000-50,000) 175,000
Tax consequences :
Ordinary dividend tax rate for $25,000
Capitalize gain treatment for $50,000 and $175,000
Page 286
Problem 1.
a. Because the petitioners, husband and wife together actually owned 1,083,117
share out of the 4.8million and their sons own 3.2 million share, thus a total of 90percent
of the outstanding voting stock. Section 304(a)(1)provides, in pertinent part, that, if one
or more persons are in control of each of two corporations and if one of those
corporations acquires stock in the other corporation from the person or persons in control,
then the transaction shall be treated as a distribution in redemption for purposes of section
302. So Section 304 applies.
b. The control test of sections requires that the attribution rules be applied in
determining control for section 304 purposes. We need to apply section 318 in
determining control for section 304 purposes. Test of section 302(b)(a), it requires that
the redemption be not essentially equivalent to a dividend.
c. The Court decided that based in part on a sharp cleavage between the executor of
the taxpayer estate and members of the Squier, the court held that the distribution there
was not essentially equivalent to a dividend and implicit in this conclusion was the belief
that the attribution rules were not conclusive in all events in determining whether there
had been a significant change of control which would allow the conclusion that the
distribution was not essentially equivalent to a dividend.
d. To avoid, the taxpayer needs to pay attention to completely terminate.
Problem 2
a. 20/60=0.333 dividend rate for all
b. 80%*5000=4000 4000 capital rate, 8000 capital rate
c. Same as above.
d. Same as above.
e. Section 304 not applicable.
Page 289 problem
If Y Corporation redeems shares from Georges estate, the redemption will not qualify for
exchange treatment under section 303. Section 303(b)(2) requires that the value of all the
stock of the distributing corporation included in the decedents gross estate must exceed
35 percent of the total gross estate. A special rule permits the stock of two or more
corporations to be aggregated for purposes of this 35 percent test if 20 percent or more in
value of each corporations total outstanding stock is included in the gross. Based on the
calculation below, percentage of ownership in X is less than 20%. So the redemption will
not qualify for exchange treatment.

Percentage of ownership in X = 600/4,200=14.28%

Percentage of ownership in Y = 1,200/4,800=25%