South Western Federal Taxation 2016 Corporations Partnerships Estates and Trusts 39Th Edition Hoffman Solutions Manual Full Chapter PDF

South-Western Federal Taxation 2016
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CHAPTER 6
CORPORATIONS: REDEMPTIONS AND LIQUIDATIONS
SOLUTIONS TO PROBLEM MATERIALS
DISCUSSION QUESTIONS
1. (LO 1) In a sale of stock to a third party, the shareholder’s ownership interest in the corporation is
diminished, and such dispositions result in sale or exchange treatment. In a stock redemption, however,
a shareholder’s ownership interest in the corporation may be unaffected as a result of the redemption.
This is particularly true where the stock of the corporation is solely owned or owned entirely or
predominately by related parties. It is this possibility of little or no diminishment in ownership interest
in a stock redemption that gave rise to the qualifying stock redemption rules. In those cases where a
shareholder’s ownership is sufficiently diminished as a result of a stock redemption, sale or exchange
treatment is the result. However, if a shareholder’s ownership is relatively unaffected as a result of a
stock redemption, the transaction has the same effect as a dividend distribution and is taxed as such.
2. (LO 1, 2, 6)
• Whether Louis or Mari have a preference for personally acquiring the Cerise stock or for a stock
6-1
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6-2 2016 Corporations Volume/Solutions Manual
redemption or for a sale to a third party.

• Whether Louis or Mari have the financial resources to acquire the Cerise stock.
• If Louis or Mari do acquire the Cerise stock, their basis in the shares.
• Whether Cerise Corporation has the financial resources, including the ability to issue its own notes,
to fund a stock redemption.
• If Chao has a preference for a cash transaction, whether Cerise has sufficient cash available for
such a distribution or property that can be sold to fund a distribution.
• If Cerise must sell property to finance a redemption, what property should be sold and the tax
consequences resulting from such a sale?
• If property can be distributed in the redemption, whether Cerise has property suitable for a
distribution and the tax consequences from such a distribution.
• If property is distributed pursuant to a redemption, Chao’s basis and holding period for such
property.
• The effect of any property sale and redemption distribution on Cerise’s E & P.
• The tax treatment of any expenditures incurred in a redemption of Chao’s shares, including interest
expense related to a debt-financed redemption.
• Whether there is a market for a sale of the stock to a third party.
3. (LO 1) Corporate shareholders normally prefer dividend income treatment for a redemption (i.e.,
nonqualified stock redemption) because the dividends received deduction available to such taxpayers
minimizes the resulting taxable income. Also, corporate taxpayers do not receive preferential tax rate
treatment for dividend and long-term capital gain income.
4. (LO 1) No. In general, for purposes of the qualifying stock redemption provisions, the stock attribution
rules apply in determining a shareholder’s ownership interest before and after a redemption. However,
the attribution rules do not apply in the case of partial liquidations or redemptions to pay death taxes.
Further, the family attribution rules can be waived in the case of certain complete terminations.
5. (LO 1) A corporate distribution in exchange for stock qualifies as a not essentially equivalent
redemption if there is a “meaningful reduction” in the shareholder’s ownership after the redemption.
The “meaningful reduction test” is applied whether the stock redeemed is common stock or preferred
stock. A decrease in the redeeming shareholder’s voting control appears to be the most significant
indicator of a meaningful reduction, but reductions in the rights of redeeming shareholders to share in
corporate earnings or to receive corporate assets upon liquidation are also considered. If a shareholder
continues to have dominant voting control after a redemption, there probably will not be a “meaningful
reduction” in the shareholder’s ownership in the corporation. The § 318 attribution rules apply in
determining whether there has been a meaningful reduction.
6. (LO 1) The basis of shares redeemed in a nonqualified stock redemption attaches to the shareholder’s
remaining stock basis or, if that shareholder has no remaining direct stock ownership, to stock the
shareholder owns constructively.
7. (LO 1) To qualify as a disproportionate redemption, the shareholder’s ownership interest in the

corporation after the redemption must be:
• less than 80% of the ownership interest before the redemption, and
• less than 50% of the total combined voting power of all classes of stock entitled to vote.
Corporations: Redemptions and Liquidations 6-3
The stock attribution rules apply in determining the shareholder’s ownership interest before and after
the redemption.
8. (LO 1, 2)
• Barry’s basis in the property transferred in the § 351 transaction and the basis in his stock.
• If Barry transferred property in the § 351 transaction with a built-in loss and if so, whether the
election was made to reduce the shareholder’s stock basis in lieu of the basis step-down
applicable to Pheasant.
• Whether the redemption qualifies for sale or exchange treatment.
• Whether Barry is related to any shareholder of Pheasant Corporation.
• If Barry is related to a shareholder of Pheasant, will he continue employment with the

corporation?
• Barry’s basis and holding period in the property received in the redemption.
• Pheasant’s E & P at the time of the distribution.
• Whether Pheasant has a recognized gain or an unrecognized loss as a result of the property
distribution.
• The effect of the distribution on Pheasant’s E & P.
• Whether Pheasant incurred any (nondeductible) redemption expenditures as a result of the
distribution.
9. (LO 1, 6) Unless Lauren satisfies the requirements for the family attribution waiver, she is deemed to
own the shares owned by Brett, or 100% of the Viridian shares outstanding after the redemption. Such
a level of ownership would not satisfy any of the qualifying stock redemption provisions for sale or
exchange treatment. If Lauren satisfies the requirements of the family attribution waiver (e.g., no
prohibited interest held during the 10-year post-redemption period), the redemption would qualify for
sale or exchange treatment as a complete termination redemption. Lauren’s current employment with
Viridian Corporation, as president and chair of the board of directors, would constitute prohibited
interests for purposes of the family attribution waiver. As such, Lauren would have to resign from those
positions as a condition for qualifying the redemption for sale or exchange treatment.
10. (LO 1) In determining whether a distribution is not essentially equivalent to a dividend for the partial
liquidation rules, the test is applied at the corporate level (rather than the shareholder level, as is the
case of a not essentially equivalent redemption). The test requires a genuine contraction of the
corporation’s business and is based on the facts and circumstances of each case. A safe-harbor rule, the
termination of a business test, will satisfy the not essentially equivalent to a dividend requirement. To
qualify for the termination of a business test, the distribution must consist of the assets (or the proceeds
from the sale of the assets) from a trade or business that was actively conducted throughout the five-
year period ending on the date of the distribution. In addition, the corporation must continue to actively
conduct another five-year-old trade or business immediately after the distribution. Finally, neither of
the active businesses must have been acquired in a taxable transaction within that same five-year period.
11. (LO 1, 2)
• Whether Brown operated the discontinued business and one other business for the entire five-year
period preceding the distribution.
• Whether Brown would recognize gain or loss on the distribution or sale of the assets. If the assets
are sold, whether any would be sold to related parties.

• Whether Brown would incur any expenses with respect to any sale of assets or distribution to
shareholders.
• Brown’s E & P before and after any distribution.
• Whether there will be a redemption of stock from the shareholders and, if so, whether the
redemption would be pro rata with respect to the shareholders.
• The shareholders’ basis in their Brown stock before and after any distribution.
• Whether any of the shareholders are corporate taxpayers.
• The shareholders’ basis in any assets received in a distribution.
12. (LO 1, 2) A redemption to pay death taxes is applicable to stock of a corporation that is included in the
gross estate of a decedent and whose value exceeds 35% of the value of the adjusted gross estate. In
determining the 35% requirement, stock of two or more corporations is treated as the stock of a single
corporation if 20% or more in value of the outstanding stock of each corporation is included in the
decedent’s gross estate. Sale or exchange treatment is available under § 303 to the extent of the sum of the
estate’s death taxes and funeral and administration expenses.
A redemption to pay death taxes is treated as a sale or exchange of the stock for the estate (shareholder).
Because the estate’s basis in the redeemed stock is stepped up (or down) to fair market value at death
(or alternate valuation date, if elected), there is generally no gain (or loss) recognized by the estate in a
§ 303 redemption. If property is received in the redemption, the estate’s basis in the property is its fair
market value on the date of the redemption. The property’s holding period begins on the date of the
redemption.
The distributing corporation recognizes gain (but not loss) on any distribution of property pursuant to
a redemption to pay death taxes. The corporation’s E & P is reduced by an amount not in excess of the
ratable share of the E & P attributable to the stock redeemed. No deduction is allowed for any
expenditures incurred in connection with the redemption, with the exception of interest expense related
to the redemption that is otherwise deductible.
13. (LO 1, 2)
• Valuation of Angie’s estate.
• Whether the executor should elect the alternate valuation date.
• Whether Angie’s lifetime gifts to Ann included stock in Bluebird Corporation and, if so, the facts
surrounding that transfer (e.g., dates, motivation).
• Whether a redemption of the estate’s shares in Redbird Corporation will qualify under § 303.
• Whether a redemption of the estate’s shares in Bluebird will qualify under § 303 (redemption to
pay death taxes) or § 302 (complete termination redemption).
• If a redemption of Bluebird stock is advantageous, whether noncash property should be distributed
in the redemption and, if so, which property.
• Whether Ann should purchase the estate’s shares in Bluebird.
• Effect of Angie’s lifetime gifts for her estate as to the unified tax credit.
• Marital and other estate deductions.
• Due date of estate tax return.

• Income tax return for estate.
14. (LO 1, 2, 6)
• Whether Pink Corporation should distribute a cash dividend to Donna to enable her to buy Steven’s
stock and, if so, the tax consequences to Donna.
• Whether Pink Corporation should redeem Steven’s stock and, if so, the tax consequences to Steven.
• Effect of any dividend or redemption distribution on Pink Corporation’s E & P.
• Deductibility of any expenditures incurred by Pink Corporation in connection with a stock
redemption.
• Whether Donna and Steven live in a community property state.
• How to sell the residence and utilize the exclusion provision of § 121.
• Tax consequences of alimony, child support, and the property settlement.
• Dependency deductions for the children.
• Deductibility of legal costs associated with the divorce.
• Donna’s and Steven’s filing statuses.
15. (LO 3) In a sale of § 306 stock to an unrelated party, the shareholder generally recognizes ordinary
income to the extent of the stock’s fair market value on the date of the stock dividend. The preferential
tax rate for dividends applies to this ordinary income. If the amount realized in the sale exceeds the
ordinary income taint, the excess is applied against the basis of the preferred stock. No loss is
recognized on a sale of § 306 stock; instead, any unrecovered basis in the preferred stock attaches to
the basis of the shareholder’s common stock. A sale of § 306 stock has no effect on the issuing
corporation’s E & P.
16. (LO 4) Corporate losses are disallowed in complete liquidations in four situations. First, a loss is
disallowed on the distribution of property to a related person if such distribution either is not pro rata
or it consists of disqualified property. Second, a loss is disallowed on the sale, exchange, or distribution
of property that was contributed to the corporation (in a § 351 or contribution to capital transaction)
with a built-in loss (fair market value less than basis, after application of the basis step-down rules)
shortly before the adoption of a plan of liquidation. This disallowance applies when the corporation’s
acquisition of the property was part of a plan whose principal purpose was to recognize a loss on that
property by the liquidating corporation. The last two disallowance rules apply in the case of a
liquidation of a subsidiary corporation. In liquidation, a subsidiary corporation does not recognize
losses on the distribution of property to its parent shareholder. Similarly, losses on the distribution of
property to the minority shareholders of a liquidating subsidiary also are not recognized.
17. (LO 4) Disqualified property is property that is acquired by the corporation in a § 351 or contribution
to capital transaction during the 5-year period ending on the date of the liquidating distribution.
18. (LO 4) A tax avoidance purpose is presumed if the property was acquired by the corporation within
two years of the adoption of a plan of liquidation. This presumptive rule can be rebutted if there was a
clear and substantial relationship between the property and the corporation’s business(es). The built-in
loss rule will apply only in very limited cases where the corporation acquired the property in question
more than two years prior to the adoption of the plan of liquidation.
19. (LO 4) The general rule under § 331 provides for sale or exchange treatment to the shareholder. The
shareholder is treated as having sold his or her stock to the corporation being liquidated. Thus, the
difference between the fair market value of the assets received from the corporation and the adjusted
basis of the stock surrendered is the gain or loss recognized. Typically, the stock is a capital asset in the
hands of the shareholder and capital gain or loss results. The basis of property received in a liquidation
is the property’s fair market value on the date of the distribution.
20. (LO 5) A parent corporation recognizes no gain or loss in a § 332 liquidation of a subsidiary. The parent
takes a basis in the property received equal to the subsidiary’s basis in such property. In addition, the
parent’s holding period in the property includes that of the subsidiary. Other tax attributes of the
subsidiary (e.g., net operating loss carryover, E & P) also carry over to the parent corporation. The
parent’s basis in its subsidiary stock is eliminated. (If the parent receives property from the subsidiary
in satisfaction of indebtedness, the parent recognizes gain or loss.)
21. (LO 5)
a. The parent corporation must own 80% or more of the subsidiary’s voting stock and 80% or
more in value of all its other stock (other than nonvoting preferred) at the time the plan of
liquidation is adopted and until all property is distributed, or the liquidation will not qualify
under § 332.
b. The subsidiary must distribute all its property in complete redemption of all its stock within the
taxable year in which the first distribution is made or within three years from the close of the
tax year in which the first distribution occurred pursuant to the adoption of a plan by the
corporation. Otherwise, the liquidation will not qualify under § 332.
c. The subsidiary must be solvent, or § 332 will not apply. If the subsidiary is insolvent, the parent
corporation will have an ordinary loss deduction for its worthless stock in the subsidiary.
22. (LO 5) A subsidiary corporation recognizes gain (but not loss) on the distribution of property to a
minority shareholder pursuant to a liquidation otherwise governed by § 332. The minority shareholder
recognizes gain or loss equal to the excess of the fair market value of the property received over the
shareholder’s basis in the subsidiary stock. The basis of the property received by the minority
shareholder is the property’s fair market value on the date of the distribution.
23. (LO 5) If a parent makes a § 338 election, the subsidiary is treated as having sold its assets on the
qualified stock purchase date for a value that is determined with reference to the parent’s basis in the
subsidiary stock plus any liabilities of the subsidiary. The deemed sale of assets results in gain or loss
recognition to the subsidiary corporation. The subsidiary is then treated as a new corporation that
purchased those assets on the day following the qualified stock purchase date for a similarly computed
value. The deemed purchase results in a new stepped-up (or -down) basis for the subsidiary’s assets.
The new basis in the subsidiary’s assets carries over to the parent corporation if the subsidiary
corporation is subsequently liquidated.
24. (LO 5) Under the general nonrecognition rules, the parent corporation recognizes no gain or loss on
liquidating distributions from the subsidiary, takes a carryover basis and holding period in the assets
received, and acquires the other tax attributes (e.g., net operating loss carryover, E & P) of the
subsidiary (subject to the carryover rules of § 381). The parent’s basis in the stock of the subsidiary
disappears.
The tax consequences to a parent corporation in a subsidiary liquidation that follows a § 338 election
are governed by the same rules as above, but substantive differences will result due to the § 338 election.
The parent corporation still recognizes no gain or loss on liquidating distributions from the subsidiary.
Also, the parent takes a carryover basis and holding period in the assets received. However, these bases
will reflect the stepped-up (or -down) basis resulting from the subsidiary’s deemed asset sale and
repurchase under § 338. Further, the holding period of the assets will begin on the date of the qualified
stock purchase. The parent will acquire the other tax attributes (e.g., net operating loss carryover, E &
P) of the subsidiary, but those attributes are likely to be nominal in amount as the subsidiary is treated
as a new corporation as of the day following the qualified stock purchase date. The parent’s basis in the
stock of the subsidiary disappears.
COMPUTATIONAL EXERCISES
25. (LO 1)
a. Brandi incurs tax of $23,250 on her redemption. Since the distribution was a qualifying stock
redemption, it is taxed as a sale or exchange. Thus, the tax is $23,250 = 15% (LTCG tax rate)
× $155,000 LTCG [$200,000 (amount realized) – $45,000 (basis in stock)].
b. Yuen incurs tax of $30,000 on her redemption. Since the distribution was a nonqualified stock
redemption, the entire distribution is taxed as a dividend. Thus, the tax is $30,000 = 15%
(dividend tax rate) × $200,000.
26. (LO 1) Rosalie has a recognized loss of $20,000 [$80,000 (amount realized) – $100,000 (stock basis)]
on the redemption. A qualifying stock redemption is treated as a sale or exchange. Since Rosalie does
not own (directly or indirectly) more than 50% of Salmon’s stock at the time of the redemption, § 267
does not apply to disallow loss recognition.
27. (LO 1) Derk owns (directly and indirectly) 720 shares in Rose. Derk owns 250 shares directly plus 470
shares indirectly [150 from daughter plus 320 (80% × 400) from partnership].
28. (LO 2)
a. The distribution of Property A would result in a $75,000 recognized gain [$150,000 (fair
market value) – $75,000 (basis)] to Indigo. Distributions in redemption of stock are governed
under § 311. Under that provision, gains (but not losses) are recognized on the distribution of
property.
b. The distribution of Property B would result in a $45,000 disallowed loss [$150,000 (fair market
value) – $195,000 (basis)] to Indigo. Under § 311, gains but not losses are recognized on the
distribution of property.
c. A sale of Property B to an unrelated party would result in a $45,000 recognized loss [$150,000
(fair market value) – $195,000 (basis)] to Indigo.
29. (LO 2) E & P is reduced by $60,000: the lesser of the $145,000 distribution amount or the $60,000
ratable share of E & P attributable to the stock redeemed [$300,000 (E & P) × 20% (1,000/5,000)].
30. (LO 1, 4)
a. Dividend income of $120,000. In a nonqualified stock redemption, a distribution is treated as
dividend income to the extent of the distributing corporation’s E & P. (The $50,000 basis in the
redeemed stock attaches to the basis of the remaining Sunset stock owned by the shareholder.)
b. Capital gain of $70,000. A qualifying stock redemption results in sale or exchange treatment;
thus, $120,000 amount realized – $50,000 stock basis = $70,000 capital gain.
c. Capital gain of $70,000. A liquidating distribution results in sale or exchange treatment; thus,
$120,000 amount realized – $50,000 stock basis = $70,000 capital gain.
31. (LO 4)
a. Gain recognized of $230,000. A distribution in complete liquidation generally results in
recognized gain or loss as if the property were sold for its fair market value. Thus, $880,000
fair market value – $650,000 basis = $230,000 gain recognized.
b. Gain recognized of $230,000. A distribution in complete liquidation generally results in
recognized gain or loss as if the property were sold for its fair market value. If the property is
distributed subject to a liability, the fair market value in the deemed sale cannot be less than
the amount of such liability. In this case, the liability ($690,000) is less than the property’s fair
market value ($880,000); thus, the gain recognized is the same as part a., above.
c. Gain recognized of $235,000. A distribution in complete liquidation generally results in
recognized gain or loss as if the property were sold for its fair market value. If the property is
distributed subject to a liability, the fair market value in the deemed sale cannot be less than
the amount of such liability. Thus, $885,000 liability amount – $650,000 basis = $235,000 gain
recognized.
32. (LO 4)
a. Osprey recognizes a gain of $240,000 on the distribution of the land to Pedro. Liquidating
distributions generally result in recognized gain or loss as if the property were sold for its fair
market value. Thus, $440,000 fair market value – $200,000 basis = $240,000 gain recognized.
b. Osprey recognizes a loss of $110,000 on the distribution of the equipment to Pittro. Liquidating
distributions generally result in recognized gain or loss as if the property were sold for its fair
market value. Thus, $140,000 fair market value – $250,000 basis = $110,000 loss recognized.
The related-party loss limitation does not apply, as the distribution is not to a more than 50%
shareholder (related party). The built-in loss limitation does not apply, as the property was not
acquired in a § 351 or contribution to capital transaction.
33. (LO 4)
a. Martin has a carryover basis of $300,000 in Property 1. For Property 2, however, the basis step-
down rule applies. Thus, Martin’s basis in Property 2 is $475,000 ($525,000 carryover basis –
$50,000 net built-in loss).
b. Martin has a realized loss of $125,000 ($350,000 distribution FMV – $475,000 stepped-down
basis). The built-in loss limitation applies to disallow the loss that was inherent in the property
on the date acquired, after considering the basis step-down rule, or $75,000 ($400,000
acquisition FMV – $475,000 stepped-down basis). The remaining loss of $50,000, representing
the decline in the property’s FMV after being acquired by Martin, is not subject to the built-in
loss limitation. The related-party loss limitation does not apply to the distribution, as it was not
to a related party (more than 50% shareholder). Thus, Martin has a $50,000 recognized loss on
the distribution of Property 2.
34. (LO 4) Bruno has a gain recognized of $506,000 [$786,000 amount realized ($920,000 – $134,000) –
$280,000 stock basis] as a result of the liquidation.
35. (LO 5)
a. The liquidation of Quail is a parent-subsidiary liquidation governed under § 332. Thus, Quail
(subsidiary) recognizes no gain or loss on liquidating distributions to Pheasant (parent)
[§ 337(a)].
b. Quail recognizes a gain of $40,500 [($1 million FMV – $730,000 basis) × 15%] on the
distribution of property to Gisela, a minority shareholder. In a liquidation otherwise subject to
§ 332, a subsidiary corporation recognizes gain (but not loss) on the distribution of property to
a minority shareholder.
36. (LO 5) Blush recognizes a gain of $200,000 ($1,500,000 amount realized – $1,300,000 bond basis) on
the distribution. Section 332 nonrecognition treatment does not apply to distributions received in
satisfaction of indebtedness of a subsidiary.
37. (LO 5)
a. Goose recognizes no gain or loss on the liquidation under § 332. Goose’s basis in the Swift
stock ($2,400,000) disappears.
b. Goose has a carryover basis of $1,700,000 in the assets received in liquidation.
PROBLEMS
38. (LO 1, 2, 6)
a. Teal Corporation would have a taxable gain of $250,000 on the property distribution [$400,000
(fair market value) – $150,000 (basis in property)]. The gain would be ordinary or capital
depending on the type of property distributed. The E & P of Teal Corporation would be
increased by $250,000 (the amount of gain to Teal) and decreased by $400,000 (the FMV of
the property distributed). Teal’s E & P also would be decreased by the amount of tax due on
the gain recognized. Grace would have dividend income of $400,000 and a basis in the property
of $400,000.
b. The tax consequences to Teal Corporation would be the same as in option a. Grace Corporation
would have dividend income of $400,000, but only 30% of the $400,000, or $120,000, would
be taxed to Grace. Because Grace Corporation has a less than 20% ownership interest in Teal
Corporation, the 70% dividends received deduction is applicable. Grace Corporation would
have a basis of $400,000 in the property.
c. The tax consequences to Teal Corporation would be the same as in option a. except that Teal’s
E & P is reduced by the ratable share of its E & P attributable to the stock redeemed (percentage
not provided). Grace would have a capital gain of $310,000 [$400,000 (value of the property)
– $90,000 (basis in stock)] and a basis of $400,000 in the property received.
d. The tax consequences to Teal Corporation would be the same as in option c. Grace Corporation
would have a capital gain of $310,000 [$400,000 (value of the property) – $90,000 (basis in
stock)] and a basis of $400,000 in the property received.
e. Assuming Grace is an individual, she would choose the qualifying stock redemption (option
c.). If the distribution is a qualifying stock redemption, she has a capital gain of $310,000. If
the distribution is a dividend, as in option a., she would have dividend income of $400,000.
Her basis in the property received is the same whether the transaction is a dividend or a
qualifying stock redemption. If Grace is a corporation, it would prefer that the distribution be
a dividend because only 30% of the dividend would be taxed (option b.). Teal Corporation
itself would have no preference because the tax consequences from the transaction are the same
under each option.
39. (LO 1)
a. Julio’s income tax liability would be $15,000, computed as follows: $150,000 (amount
realized) – $50,000 (basis in the 1,000 shares redeemed) = $100,000 (long-term capital gain)
× 15% = $15,000.
b. Julio’s income tax liability would be $22,500, computed as follows: $150,000 (dividend) ×
15% = $22,500.
40. (LO 1)
a. Tax liability for a corporate shareholder would be $34,000, computed as follows: $150,000
(amount realized) – $50,000 (basis in the stock) = $100,000 (long-term capital gain) × 34% =
$34,000. Corporations do not receive a preferential tax rate on long-term capital gains.
b. Tax liability for a corporate shareholder on a $150,000 dividend from a corporation in which
it has a 25% interest would be $10,200, computed as follows: $150,000 (dividend) – $120,000
[80% (dividends received deduction) × $150,000] = $30,000 × 34% = $10,200. Corporations
do not receive a preferential tax rate on dividend income.
41. (LO 1)
a. Julio may deduct the entire $50,000 capital loss carryover to offset $50,000 of the $100,000
long-term capital gain. Thus, Julio would be taxed on only $50,000 of gain. Income tax liability
on the $50,000 long-term capital gain would be $7,500 ($50,000 × 15%).
b. Julio could only deduct $3,000 of the $50,000 capital loss carryover. Julio’s income tax liability
on the $150,000 dividend received would be $22,500 ($150,000 × 15%).
c. The preferred outcome in this situation is that which provides sale or exchange treatment
(option a.). With a qualifying stock redemption, Julio’s income tax liability is $15,000 less
($22,500 – $7,500) than if the redemption is treated as a dividend.
42. (LO 1)
a. The corporation could offset the entire $50,000 capital loss carryover against the $100,000
long-term capital gain. Thus, only $50,000 of the gain would be taxed. The tax liability would
be $17,000 ($50,000 × 34%).
b. The corporation could not deduct any of the $50,000 capital loss carryover. Corporations may
only offset capital losses against capital gains. Thus, the corporation would have dividend
income of $150,000 less a dividends received deduction of $120,000 (80% × $150,000). The
remaining $30,000 would be taxed at 34%, for a tax liability of $10,200.
43. (LO 1)
a. Howard owns 1,350 shares, 600 shares directly and 750 shares indirectly, in Silver. Howard
constructively owns the stock of his mother (300 shares) and his son (100 shares) and 70% of
the 500 shares, or 350 shares, owned by Maroon Corporation. Howard is not deemed to own
his grandfather’s stock.
b. The stock attribution rules do not apply to stock held by a corporation if the shareholder owns
less than 50% of the stock in that corporation. Thus, Howard would only own 1,000 shares,
600 shares directly and 400 shares owned by his mother (300 shares) and son (100 shares).
c. Howard would now own 1,400 shares in Silver, the 1,350 shares as computed in a. above plus
50 shares as a result of his 25% partnership interest [200 (shares owned by Yellow Partnership)
× 25% (Howard’s interest in the partnership)].
44. (LO 1)
a. The distribution does not satisfy the qualifying stock redemption provisions; thus, Shonda
has $225,000 of dividend income. After the redemption, Shonda owns 52.4% of the Rook
shares outstanding [550 (postredemption shares owned) ÷ 1,050 (postredemption shares
outstanding)]. This postredemption ownership interest fails the requirements for a
disproportionate redemption or a complete termination redemption. Also, since Shonda still
has dominant control of Rook, there has not been a “meaningful reduction” of her ownership
interest in Rook. Thus, the transaction fails to qualify as a not essentially equivalent
redemption. Shonda’s basis in the 450 shares redeemed attaches to the basis in her remaining
Rook shares. Thus, Shonda has a $50,000 basis in her remaining 550 shares.
b. The distribution qualifies as a disproportionate redemption; thus, Shonda has a recognized

long-term capital gain of $270,000 [$300,000 (amount realized) – $30,000 (basis in shares
redeemed)]. After the redemption, Shonda has an ownership interest in Rook of 44.4% [400
(postredemption shares owned) ÷ 900 (postredemption shares outstanding)]. This ownership
interest is less than 80% of her original ownership [44.4% < 53.4% (80% × 66.7%)] and less
than 50% of the total combined voting power.
45. (LO 1, 2) Hoffman, Raabe, Maloney, & Young, CPAs
5191 Natorp Boulevard
Mason, OH 45040
April 30, 2015
Lana Johnson
1000 Main Street
St. Paul, MN 55166
Dear Lana:
This letter is in response to your questions concerning a possible redemption of shares of stock you
own in Stork Corporation. Currently, you own 400 shares of Stork common stock, and the remaining
outstanding shares are owned by Lori Jones (your mother), 200 shares, and Leo Jones (your brother),
400 shares. You paid $200 per share for your stock eight years ago. You are interested in reducing your
stock ownership in Stork via a stock redemption that would pay you $1,000 per share, the fair market
value of the stock. Stork Corporation (E & P of $850,000) would distribute cash for the entire
redemption transaction. You have asked us to determine the minimum number of shares that you would
have to redeem in order to obtain favorable long-term capital gain treatment, and the overall tax
consequences of such a redemption to both you and Stork Corporation. Our conclusion is based upon
the facts as outlined in your April 22 letter. Any change in facts may cause our conclusions to be
inaccurate.
In the redemption transaction, you will be deemed to own the shares owned by your mother, Lori. As
such, your current ownership interest is 60% {[400 shares (owned directly) + 200 shares (owned by
your mother)] ÷ 1,000 shares outstanding}. To obtain long-term capital gain treatment on a redemption,
your postredemption ownership must be less than 50% of the total remaining shares outstanding, and
less than 80% of your preredemption ownership of 60% (i.e., less than 48%). The minimum number of
shares that you must redeem to obtain the desired result is 231 shares. A redemption of 231 shares
would satisfy the postredemption ownership tests. After the redemption, your ownership interest of
47.98% [369 shares (169 shares owned directly plus your mother’s 200 shares) ÷ 769 shares (Stork
shares outstanding after redemption)] satisfies both the 50% and 80% tests.
The redemption of 231 shares would result in a long-term capital gain to you in the amount of $184,800
[$231,000 (redemption proceeds) – $46,200 (cost of shares redeemed)]. The redemption would result
in a reduction of Stork Corporation’s E & P in the amount of $196,350 [$850,000
(E & P preredemption) × 23.1% (percentage of shares outstanding represented by your shares
redeemed)].
Should you need additional information or need to clarify our conclusion, do not hesitate to call on me.
Sincerely,
Marilyn C. Stephenson,
CPA Partner
TAX FILE MEMORANDUM

DATE: April 30, 2015
FROM: Marilyn C. Stephenson
SUBJECT: Lana Johnson
Today I advised Lana Johnson with respect to her April 22 letter. She is interested in reducing her
ownership interest in Stork Corporation (E & P of $850,000) in a stock redemption that would provide
her long-term capital gain treatment. Stork would pay Lana $1,000 for each share of the corporation’s
stock, the estimated fair market value of the stock. Currently, Stork Corporation has 1,000 shares of
stock outstanding owned by the following individuals: Lana Johnson, 400 shares; Lori Jones (Lana’s
mother), 200 shares; and Leo Jones (Lana’s brother), 400 shares. Lana paid $200 per share for the stock
eight years ago. She has asked us to determine the minimum number of shares that she would have to
redeem in order to obtain favorable long-term capital gain treatment, and the overall tax consequences
of such a redemption to both her and Stork Corporation.
At issue: What is the minimum number of shares that must be redeemed to qualify for sale or exchange
treatment for Lana? What are the tax consequences to Lana and Stork Corporation upon such a
redemption?
Conclusion: For purposes of a stock redemption, the shares owned by Lana’s mother, Lori, are deemed
to be owned by Lana. (The shares owned by Lana’s brother, Leo, are not considered owned by her
under the § 318 attribution rules.) Thus, Lana is deemed to own 60% of the Stork shares prior to any
redemption {[400 shares (owned directly) + 200 shares (owned indirectly from Lori)] ÷ 1,000 shares
outstanding}. Using an algebraic formula, it is determined that Lana must redeem a minimum of 231
shares in order to satisfy the 50% and 80% postredemption ownership tests of a disproportionate
redemption under § 302(b)(2).
(600 – X) ÷ (1,000 – X) < 60% × 80%
To solve X:
(600 – X) ÷ (1,000 – X) = 48%
Multiply both sides of the equation by (1,000 – X) to get: (600 – X) = .48(1,000 – X)
(600 – X) = 480 – .48X
120 = .52X
231 (rounded up) = X
A redemption of 231 shares would satisfy both of the postredemption ownership tests. After the
redemption, Lana’s ownership interest of 47.98% [369 shares (169 shares owned directly plus Lori’s
200 shares) ÷ 769 shares (Stork shares outstanding after redemption)] satisfies both the 50% and 80%
tests.
A redemption of 231 shares in Stork would result in a long-term capital gain to Lana in the amount
of $184,800 [$231,000 (amount realized) – $46,200 (basis of shares redeemed)]. The redemption would
result in a reduction of Stork Corporation’s E & P in the amount of $196,350 [$850,000
(E & P preredemption) × 23.1% (percentage of shares outstanding represented by the shares
redeemed)].
46. (LO 1)
a. The redemption cannot qualify as a complete termination redemption. Angelica is deemed to
own Dean’s 1,500 shares or 75% (1,500 ÷ 2,000) of the remaining shares outstanding. (There
is no attribution under § 318 for stock owned by an uncle.) The family attribution waiver does
not apply because Angelica’s position as a director of Cyan Corporation is a prohibited interest.
Even if the other requirements for the family attribution waiver are satisfied (e.g., Angelica
files the required agreement with the IRS), Angelica has a prohibited interest within the 10-
year postredemption period.
b. The redemption can qualify as a complete termination redemption. A creditor interest is not a
prohibited interest. Thus, if the other requirements for the family attribution waiver are
satisfied, the redemption completely terminates Angelica’s ownership interest in Cyan.
c. The redemption can qualify as a complete termination redemption. Dean’s employment as

president of Cyan Corporation is not a prohibited interest for Angelica. Thus, if the other
requirements for the family attribution waiver are satisfied, the redemption completely
terminates Angelica’s ownership interest in Cyan.
d. The redemption cannot qualify as a complete termination redemption. Angelica is deemed to

own Dean’s 1,500 shares or 75% (1,500 ÷ 2,000) of the remaining shares outstanding. The
family attribution waiver does not apply because Angelica’s acquisition of Cyan stock by gift
is a prohibited interest. Even if the other requirements for the family attribution waiver are
satisfied, Angelica has acquired a prohibited interest within the 10-year postredemption period.
47. (LO 1, 2)
a. With respect to the distribution, Lori would have dividend income of $600,000 and Swan
Corporation would reduce its E & P by $600,000. As a result of the stock transaction, Lori
would have a basis of $600,000 in the newly acquired 500 shares and become the sole
shareholder of Swan. Robert would have a capital gain of $515,000 [$600,000 (amount
realized) – $85,000 (basis in stock)] on the sale. The stock transaction would not affect Swan.
b. The transaction would constitute a complete termination redemption and result in a capital gain
of $515,000 [$600,000 (amount realized) – $85,000 (basis in stock)] to Robert. (Siblings are
not related parties under § 318; thus, Robert’s continued employment with Swan is irrelevant
and a complete termination redemption results.) Lori would become the sole shareholder as a
result of the redemption. Swan would reduce its E & P by $500,000
[$l million (E & P at time of redemption) × 50% (interest redeemed)].
48. (LO 1, 2)
a. The redemption will qualify as a partial liquidation as to Sultan but not as to Turquoise
Corporation. A partial liquidation under § 302(b)(4) is limited to noncorporate shareholders.
The distribution of proceeds from a sale of a trade or business that Lime Corporation owned
and operated for the last five years (i.e., a qualified trade or business), coupled with the
continued operation of another qualified trade or business after the distribution, satisfies the
termination of a business test. Sultan will receive sale or exchange treatment on the redemption
resulting in a recognized gain of $300,000 [$350,000 (amount realized) – $50,000 (basis in
stock redeemed)].
Turquoise Corporation will have dividend income of $350,000, reduced by a dividends
received deduction of $280,000 (80% × $350,000). The basis of the redeemed shares ($50,000)
is added to the basis of Turquoise’s remaining 750 shares of Lime stock.
Lime Corporation will have a recognized gain of $200,000 [$700,000 (amount realized) –
$500,000 (basis)] on the sale of the trade or business. Lime will reduce its E & P by $262,500
[12.5% (percentage of shares outstanding redeemed from Sultan) × $2.1 million (E & P as of
the date of distribution)] for the distribution to Sultan. Further, Lime will reduce its E & P by
$350,000 for the distribution to Turquoise.
b. The distribution will not qualify as a partial liquidation to Sultan because Lime Corporation
has not satisfied the not essentially equivalent to a dividend requirement. The stock investment
distributed does not represent a genuine contraction of Lime’s business nor does it satisfy the
termination of a business test. The stock it holds for investment purposes does not constitute a
trade or business. Both Sultan and Turquoise Corporation will have dividend income of
$350,000 (fair market value of stock distributed to each). Turquoise Corporation will have a
dividends received deduction of $280,000 (80% × $350,000). Each shareholder will have a
basis of $350,000 in the stock received. The two shareholders will add the basis of the redeemed
shares ($50,000) to that of their remaining shares of Lime stock.
Lime Corporation will have a recognized gain of $275,000 [$700,000 (amount realized) –
$425,000 (basis in stock)] on the distribution of the stock. Lime will increase its E & P by
$275,000 for the gain and will reduce its E & P by $700,000 for the distributions.
49. (LO 1) The fair market value of the Iris Corporation stock included in Raul’s estate exceeds 35% of the
value of the adjusted gross estate ($2.5 million ÷ $7 million = 35.7%). Thus, the distribution qualifies
as a § 303 redemption to pay death taxes to the extent of the death taxes and funeral and administration
expenses, or $1 million. The remainder of the distribution, $1.5 million, does not qualify for sale or
exchange treatment under § 303; instead, that portion of the distribution must be tested under the § 302
qualifying stock redemption provisions. Under the § 318 stock attribution rules, shares owned by an
heir are deemed to be owned in full by the estate. Therefore, Raul’s estate is deemed to own the Iris
shares owned by its sole heir, Monica, or 100% of the Iris stock outstanding after the redemption. Thus,
$1.5 million of the distribution satisfies none of the § 302 qualifying stock redemption provisions and,
instead, is treated as a dividend distribution.
The estate’s basis in the Iris stock is stepped up to the $2.5 million fair market value at date of death.
As to the Iris stock redeemed under § 303 for $1 million, the estate recognizes no gain or loss [$1
million (proceeds qualifying for § 303 treatment) – $1 million (estate’s stepped-up basis in shares)]. As
to the $1.5 million portion of the distribution treated as a nonqualified stock redemption (dividend
income), the estate’s basis in the redeemed shares ($1.5 million stepped-up basis) attaches to the basis
of Monica’s stock in Iris Corporation.
50. (LO 1, 2)
a. The transaction does not qualify for sale or exchange treatment. As a result of the stock
attribution rules, Tammy is deemed to own the shares owned by Jeremy, her grandson.
Tammy’s postredemption ownership interest of 52.9% [450 (150 postredemption shares owned
directly + Jeremy’s 300 shares) ÷ 850 (postredemption shares outstanding)] fails to satisfy any
of the qualifying stock redemption provisions. Tammy therefore will recognize dividend
income equal to the amount of the distribution, or $75,000. The $7,500 basis in the stock
redeemed attaches to Tammy’s basis of her remaining shares of Broadbill stock. Broadbill
Corporation’s E & P is reduced by $75,000, the amount of the dividend distribution.
b. The transaction qualifies for sale or exchange treatment as a disproportionate redemption.
There is no attribution under § 318 for stock owned by siblings. Tammy’s postredemption
ownership interest of 17.6% [150 (postredemption shares owned by Tammy) ÷ 850
(postredemption shares outstanding)] satisfies both the 80% test [17.6% is less than 24% (80%
× 300/1,000)] and the 50% test. As a result, Tammy will recognize a long-term capital gain of
$67,500 [$75,000 (amount realized) – $7,500 (basis in shares redeemed)]. Broadbill
Corporation’s E & P is reduced by $75,000, the amount of the distribution {$75,000 is less
than the limitation of $97,500 [15% (percentage of shares outstanding redeemed from Tammy)
× $650,000 (E & P as of the date of distribution)]}.
51. (LO 2) Hoffman, Raabe, Maloney, & Young, CPAs
5191 Natorp Boulevard
Mason, OH 45040
December 4, 2015
Crane Corporation
506 Wall Street
Winona, MN 55987
Dear President of Crane Corporation:
This letter is in response to your questions concerning Crane Corporation’s tax consequences arising
out of a redemption of its stock. Crane Corporation had 2,000 shares of stock outstanding when it
redeemed 500 shares for $370,000. The shareholder received sale or exchange treatment on the
redemption. Crane had paid-in capital of $300,000 and E & P of $1.2 million at the time of the
redemption. As a result of the redemption transaction, Crane Corporation incurred $13,000 of
accounting and legal fees. Crane also had $18,500 of interest expense on debt incurred to finance the
redemption. Our conclusions are based upon the facts as outlined in your November 27 letter. Any
change in facts may cause our conclusions to be inaccurate.
Crane Corporation would reduce its E & P in the amount of $300,000 as a result of the redemption.
This represents a 25% decrease in the amount of the E & P corresponding to the 25% stock redemption.
When a stock redemption results in sale or exchange treatment for the shareholder, the
E & P account of a corporation is reduced in an amount not in excess of the ratable share of the E & P
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Bomba felt a sick faintness come upon him as he watched with
repulsion the loathsome sight. He stepped back a pace or two with
an impulse to shut the scene away from him. But at that moment
Sobrinini beheld him and called to him.
She halted in her dance, and the snakes, uncoiling themselves from
about her arms and neck, as though they knew that their part in the
frenzied performance was over, slithered off quietly into the long
marsh grass and sought their lairs.
Sobrinini darted through the ring of breathless natives, and before
Bomba had guessed her purpose threw her skinny arms about the
boy’s neck.
“Bartow! My Bartow!” she cried, in a loud, cracked voice. “Come and
dance with Sobrinini. Come!”
But Bomba drew back, striving to disengage himself from the
clinging arms of the witch woman. If one of her own loathsome
snakes had coiled about his neck, he could hardly have felt a greater
repulsion.
“Come! Come, dance with Sobrinini,” the woman said in a wheedling
voice, as she untwined her shriveled arms to grasp him by the hand.
“I will call back my snakes, and you shall fondle them to show you
that they will not fill your veins with poison or crush your bones when
Sobrinini is nigh. Come! Why do you draw back? What are you
waiting for, Bartow?”
“But I am not Bartow,” blurted out Bomba in his desperation to be rid
of her and learn the truth about himself. “Jojasta, the medicine man
of the Moving Mountain, called me Bartow also. But I am not he. I
am Bomba! Bomba, the jungle boy!”
Sobrinini paused, a look of bewilderment overspreading her sharp
features.
“Not Bartow? Not Bartow?” she mumbled, coming close to peer into
the lad’s face. “No, no, not Bartow, surely. But then you are Bartow’s
ghost.”
“I am no ghost!” cried Bomba. “Bones are in my body. Blood runs
through my veins. See—if you prick my flesh, it bleeds.”
In his eagerness to prove to the old crone that he was human and no
ghostly visitor, Bomba drew forth his machete and thrust the sharp
point of it into his brown, sinewy forearm. Blood welled up from the
slight cut, red, pulsing blood.
“See—I am no ghost!” cried the lad again. “Ghosts do not have
blood. Ghosts do not have bones. One can walk through ghosts as
one walks through the mists of the early morning. Let anyone try to
walk through me, Bomba, the jungle boy!”
The natives had stopped dancing and singing their wild invocation to
the dawn. Now they stood in a half circle about Sobrinini and Bomba,
looking on curiously.
At Bomba’s challenge, not one of them stirred. He looked
exceedingly dangerous, standing in all his splendid strength with the
sunlight glinting on the red point of his upraised machete. It would
not be well to try to walk through him.
The puzzled expression had deepened upon the face of Sobrinini.
She stood regarding Bomba with bewilderment and a dawning
suspicion.
“Then if you are not Bartow and no ghost,” she demanded, “who are
you?”
And suddenly all the lad’s long groping for the truth, his passionate
eagerness to learn the facts concerning his parents, the many
disappointments he had suffered and the realization of his desperate
loneliness rushed over him in an overwhelming flood, and filled him
with emotion that found vent in a headlong torrent of words.
“Who am I? If I could give you the answer to that question, Sobrinini,
I would not be here. I know nothing about myself except that I am
Bomba, a boy of the jungle, and have spent my life with Cody
Casson on the edge of the swamp. Casson could not tell me who I
am nor who my father and my mother were. He sent me to Jojasta,
and Jojasta before he died said, ‘Go to Sobrinini, she will tell you!’ I
have come, Sobrinini.”
He took a step toward her, hands outstretched.
At that instant there was a wild yell, and a native, panting, the sweat
streaming from him, dashed toward them and flung himself at the
feet of Sobrinini.
“The Great Spirit of the Jungle save us!” cried the frightened wretch,
trembling as with the ague. “The headhunters have come! The great
chief, Nascanora, is at hand!”
CHAPTER XX
IN THE HANDS OF THE HEADHUNTERS
There was a chorus of frightened exclamations and a wild scattering

of the natives that showed the dread that Nascanora’s name inspired
in all the people of that region.
In a twinkling, Sobrinini and Bomba found themselves alone.
The old woman herself had grown ashen. She grasped Bomba by
the hand.
“Come!” she said. “I will hide you. Quick!”
But even as she spoke there was a wild yell from the forest, and a
horde of savages, headed by Nascanora himself, burst into the
clearing.
Bomba had drawn his knife, determined to sell his life dearly. Seeing
his threatening attitude, the savages were rushing on him with
spears held high when a command from Nascanora halted them.
“Do not kill him—now,” he commanded. “That would be too easy. His
death, when it comes, must be hard and long. And after that his
head shall stand on the wigwam to show how Nascanora deals with
his enemies.”
Sobrinini stepped forward, her eyes glaring.
“Beware what you do, Nascanora,” she warned. “Leave this boy
alone and go your way lest I put my spell upon you. It is not well to
make Sobrinini angry.”
There was a murmur of uneasiness among the savages, for the
fame of Sobrinini as a witch had gone far and wide. That Nascanora
himself was not wholly unmoved was evident from the way he
evaded the blazing eyes of the old woman.
But he was made of sterner stuff than his followers, and he had
come too far to be balked of his prey.
“I would have no quarrel with Sobrinini,” he said placatingly. “I do not
wish to hurt her or her people. But the boy must go with me. Else I
will kill all the people on this island and take their heads along for the
women of my tribe to rejoice over. Nascanora has spoken!”
Before Sobrinini could speak, Bomba intervened. To fight against
such odds was hopeless. Flight was equally impossible. He must
submit to capture, and trust to his quick wit and courage to escape
later.
“Listen, Sobrinini!” he said. “They are many, and I do not wish that
your people should die. I will go with Nascanora. But first,” he added,
turning to the chief, whose eyes were glowing with a baleful glare of
triumph, “I would ask Nascanora a question.”
“Speak!” said the chief.
“Nascanora is a great chief,” said Bomba. “He is not afraid of
anyone. Is it not so?”
“It is so,” replied Nascanora, rather astonished at the tribute, but
swelling with pride.
“Then will Nascanora fight Bomba alone?” asked the lad. “Fight him
with knives?”
If a bomb had been thrown into the midst of the savages it would not
have created greater surprise. They looked at each other in
amazement. Was the boy mad?
The most astounded of all was Nascanora himself. He could not
believe his ears. To be bearded thus, he, Nascanora, in the presence
of his braves and by a boy! His eyes glowed with fury and his face
grew dark with menace.
“Such idle words will make your death still harder,” he threatened. “It
is not well to mock Nascanora.”
“I do not mock,” returned Bomba quietly. “I would make a compact
with Nascanora. I will fight him with knives. We can throw the knives
or fight hand to hand, as Nascanora chooses. But Nascanora must
swear by his gods and command his braves that, if he is killed, the
captives shall go free. It is for their freedom that I will fight
Nascanora. Surely he is not afraid.”
Lithe, supple, muscular, his head held high as he flung out the
concluding taunt, Bomba gazed full into the glowering eyes of the
chief. He hoped that Nascanora would be goaded into accepting the
challenge. The boy was a master of the machete, either thrust or
thrown. If he should conquer, as he felt sure he would, his victory at
one stroke would free the captives. If he should lose—well, that was
in the hands of fate.
Nascanora’s face was a study. It was working with rage that did not
hide, however, a shade of apprehension. He had tested the boy’s
courage on one previous occasion, and had learned to respect it. He
towered over his captive in size, but he doubted whether he
exceeded him in strength. And he doubted very much whether he
equaled him in skill and agility.
The chief was in a quandary. He knew that his braves were looking
on and wondering at his hesitation. On the other hand, life was dear
to him.
He glared at Bomba. The lad looked unflinchingly at him. And in the
duel of eyes, Nascanora’s were the first to fall.
“It is not for a great chief like Nascanora to fight with a boy,” he
blustered, seeking to cover his defeat. “He shall learn what happens
to them who speak boastful words to Nascanora. Bind his hands and
we will go.”
The command was quickly obeyed. Sobrinini again attempted to
interpose, but Bomba checked her.
“Sobrinini is good,” he said, “but there is no reason why she and her
people should be killed. Bomba will go, but he will come back again.”
“Yes, yes,” she whispered agitatedly. “You will come back. You are
brave. You made Nascanora’s heart turn to water. Sobrinini can see
into the future. You will come back, and then I will tell you what you
want to know.”
Bomba would have urged her to tell him then, but he was roughly
hurried away, leaving Sobrinini to wring her withered hands and
mutter invocations to her gods.
Despite his dangerous plight, Bomba found himself in a strangely
buoyant frame of mind. He still felt the exaltation that came from his
triumph over Nascanora. He had shamed him in the eyes of his
braves. Perhaps that would weaken his prestige with them and make
ultimate escape easier.
He was not oblivious, of course, to the fact that his defiance had
made Nascanora a more bitter enemy than ever. He watched the
angry figure striding along at the head of his braves. Doubtless at
this moment the chief was thinking of some fiendish mode of torture
with which to slake his thirst for revenge.
Before long they reached the part of the island where Nascanora
had disembarked. Here two great war canoes were drawn up.
Bomba was pushed into one of them, then the natives got in. With a
few swift thrusts of the paddle the canoes were sent into the center
of the stream. Then they headed their course for the mainland.
The savages were familiar with the rapids, and, evading the pitfalls
of the river, rapidly neared the other shore.
As they drew closer, Bomba saw the rest of Nascanora’s band
camped close to the shore. In the ring they formed he could see a
group of dejected figures, evidently the captives.
The canoes touched the bank. Bomba was pulled out by a couple of
braves and thrust into the crowd of prisoners. His eyes flew from
face to face.
They rested on the frail, tired visage of an old man who rose and
tottered toward him.
“Casson!” cried Bomba.
“Bomba!” exclaimed Casson pantingly as he threw his arms about
the boy’s shoulders.
CHAPTER XXI
THE GIANT CATARACT
The old man sobbed as he hugged the lad to his breast.

Bomba’s joy at the reunion was no less, though his bound hands
prevented him from returning the embrace.
When at last they stood apart and looked fondly at each other,
Bomba was grieved to the heart to see the ravages that the
hardships and miseries of the journey had made in the face and
frame of the old naturalist. The first was so thin as to be almost
transparent, and the latter had wasted to a shadow.
But he was still alive. Bomba had not come too late to see him once
more in the flesh. He would still have a chance of rescuing him and
taking him back to the old cabin where he could end his days in
peace. But the boy’s heart sank as he looked at the bonds on his
own wrists and realized how slight his chances were to rescue
anybody while he was a captive himself.
When their first emotion had somewhat subsided, Bomba had time
to look about for the others that he knew. Many faces were strange
to him, and it was evident that, from the headhunters’ point of view,
their foray had been crowned with great success. They were carrying
back an unusually large number of prisoners, some to be tortured
and killed, others to drag out a lifetime of misery.
Bomba’s eyes lighted on Pipina, who came forward eagerly and
threw her arms about his neck with an outburst of tears and broken
ejaculations. Also, there was Hondura, the Araos chief, who greeted
him merely with a grunt and the habitual stolidity of his race.
Then his eyes fell upon Pirah, the young daughter of Hondura, who,
herself unbound, came running toward him with outstretched arms.
She clasped Bomba’s hands fondly, noting sorrowfully that they were
bound, and snuggled close up to him, smiling in his face. He reached
down, and as she drew near, rubbed her cheek with his.
“Is Bomba glad to see Pirah?” she asked almost happily.
“Yes,” answered the boy, forbearing to add that he would far rather
never have seen her at all than to see her in such a position. “Pirah
saved Bomba’s life when he came to the village of the Araos, and
Bomba will never forget.”
“But no, Bomba, you must not be glad. We are captives,” and the
child’s bright face clouded. “We go as slaves. You may not teach me,
as you did before, to shoot the bow and arrow. Do you remember
when you came to our village that you showed me how to use your
bow? But now—oh, what is to become of you, of me?”
Every word the little girl uttered stabbed Bomba to the heart. She
had saved his life once. She was his friend, and he had all too few
friends. He shuddered to think of what might be the fate of this
innocent child in the hands of the savage headhunters.
Their captors were preparing to break camp and were so busy with
their packing that for the time the prisoners were left to themselves.
That gave Bomba his chance to get together with Casson, Hondura
and Pipina, and exchange experiences.
He learned, to his relief, that they had not been treated as harshly as
he had feared. Their captors had kept them fairly well fed. But they
had told them frankly and gleefully why they did this. They wanted
them to be strong enough to endure for a long time the tortures that
would be meted out to them at the great festival that would attend
the entry of the triumphant warriors into their village.
But however fiendish might be the motive, the fact remained that the
prisoners were fairly strong and well. Bomba was glad of this, as it
would facilitate matters if a chance offered to make a break for
liberty.
He told them in detail of his own adventures, not neglecting the way
he had shamed Nascanora, at which they laughed gleefully. And he
brought new courage to them by telling them that the Araos, with all
the strength they could muster from other tribes, were following on
their trail. At any time now they might appear in sight and deliver
them.
While he was talking he looked up and saw two figures approaching
him. They were downcast and abject and held their faces so low on
their breasts that at first he did not recognize them. But as they drew
nearer, he saw that they were Ashati and Neram.
“You here, too?” he said, as they squatted down beside him.
“Yes, master,” Ashati answered for both, while Neram nodded his
head despondently.
“I am sorry,” said Bomba. “How did it come that you fell into the
hands of Nascanora?”
“We were waiting for you near the bank of the river,” replied Ashati,
“when we heard the march of feet. We hid in the jungle, hoping that
the enemy would go past and not see us. But they had with them the
man you caught and who told you the way to go to the island of
Sobrinini. He led them to the place where you met him, and they
beat the bushes till they found us.”
“And that man told Nascanora that I had gone to the island, and that
is why they came there for me!” exclaimed Bomba.
“We should have killed the man while we had him on the ground,”
stated Neram.
“No,” said Bomba. “But it would have been well to have bound him
and left him with you until after Nascanora had passed by. Yet the
man swore by his gods that he would not tell.”
“Nascanora has ways of making men speak,” put in Ashati
significantly.
“His heart is as black as Jojasta’s was,” declared Neram, as though
that summed up the total of human depravity. “He will torture us with
fire and steel and then place our heads on the wigwams of his
people.”
“I do not think so,” said Bomba. “Sobrinini told me that I would get
away from him. And Bomba will not leave his friends Ashati and
Neram behind.”
The news helped to dissipate the gloom on the countenances of the
slaves.
“If Sobrinini said so, it must be true!” exclaimed Ashati, “for she is a
witch.”
“The greatest in all the jungle,” confirmed Neram. “She is very wise.
Her snakes whisper in her ears and tell her what will be in the days
to come.”
They turned away much cheered and comforted, and just then their
captors gave the signal for the march.
The prisoners were herded roughly together in the center of the
marching columns, so that there could be no possible chance to
escape. Fortunately, they had had a long rest while the war party
under Nascanora had been making the raid on Snake Island, so they
were in fairly good condition for the journey, and that the journey
would not be a long one was now evident from the thunderous sound
that grew ever louder and louder in their ears. They were
approaching the Giant Cataract, where dwelt Nascanora and his
people.
To the hapless prisoners, that sound was like the knell of doom.
The thunderous sound increased in volume, and suddenly at a turn
in the trail, the most magnificent sight that Bomba had ever seen
burst upon them.
They had reached the Giant Cataract!
CHAPTER XXII
RUSPAK GLOATS
From a great bluff, hundreds of feet in height, a huge torrent of

water poured down into a gorge beneath and rose again in an ocean
of spray. The sound was deafening. The mass of waters gleamed
with all the colors of the rainbow. It was almost beyond the
imagination of a dreamer.
It made Bomba catch his breath and stand entranced. For a few
minutes he forgot that he was a prisoner, forgot the horrors that
might await him. His soul drank in the beauty of this mighty cataract
and its splendor. He had heard of its wonders, but had never
dreamed it could be like this.
But there was little time to dwell on its grandeur and sublimity. The
harsh voices of their guards drove the prisoners on. To the besotted
minds of their captors the cataract was nothing, except that it
signified that they were once more at home and now could revel in
the torture of their victims.
The main village lay near the foot of the fall, and from this now came
pouring out the women and children and old men of the tribe.
There were shouts of delight as they saw the number of prisoners
that their warriors had brought with them. They gathered about the
captives, taunting and jeering at them and striking them with sticks
until the guards intervened, not out of pity, but in order that the
captives might be kept in good condition for the horrid festival that
Nascanora was planning.
The prisoners passed through the streets of the village and their
hearts sank, for they saw the human heads, shriveled and blackened
by the sun, that were fastened on poles on the tops of the wigwams.
They had evidently been there a long time. Now a new collection
was in prospect.
In the center of the village was a rough stockade. Into this the
prisoners were corralled and left under the supervision of guards,
while the others of the band dispersed to their homes.
The captives sank down under a pall of horror. This, then, was the
end of the trail. A day or two more, while their captors were
preparing for the great festival of blood, and then torture and death.
The only calm and collected person in the whole enclosure was
Bomba. Not that he was dwelling in a fool’s paradise. He did not
disguise from himself the awfulness of the situation. But he faced it
unflinchingly. His courage had never been at a higher pitch. His mind
had never worked more clearly. He could die, and die bravely, if need
be. But he meant to live.
He was making things as comfortable as he could for Casson and
little Pirah when he heard his name spoken. He looked up quickly
and saw before him Ruspak, the medicine man.
It was Ruspak that Bomba had once captured in the jungle and
compelled to accompany him to the cabin where Casson lay at the
point of death. Against his will, Ruspak had been forced to minister
to the sick man, whom his native medicines finally brought back from
the grave. When this had been done, Bomba had dismissed the
medicine man with gifts and they had parted with professions of
friendship.
But how insincere those professions had been on the part of Ruspak
and how deeply he had resented the affront to his dignity as a
medicine man was evident now by the malignity in his eyes and the
gloating smile on his lips.
“So Bomba, the mighty Bomba, is a prisoner in the hands of
Nascanora!” he jeered. “He finds now what happens to one who
insults the messenger of the gods.”
Bomba looked at him quietly, but made no answer.
“Where now is the white man’s magic?” Ruspak sneered, as he
looked mockingly at Casson. “Where is the puma that kept guard
before the door?”
Still Bomba kept quiet, and looked at his tormentor with a contempt
that stung Ruspak to the quick.
“So Bomba has lost his tongue,” snapped the medicine man. “But
Nascanora will find that tongue. He will pull it out with redhot pincers.
Then he will cool Bomba’s mouth with water. You came to the Giant
Cataract. You see plenty water. Bomba shall have water. We will fill
his body with it till he bursts.”
Still Bomba disdained to answer.
“Bomba is strong,” mocked Ruspak. “Very strong. That is good. He
can stand torture for a long time before he dies. His eyes can be
plucked out, and still he will live. He can be burned with torches in a
hundred places and still he will live. His fingers can be cut off one by
one, and still he will live. Death will seem very sweet to Bomba. He
will pray for it, but it will be a long time before it comes. Nascanora
will see to that.”
But all his recital of the horrid tortures that were preparing for Bomba
failed to elicit a single word from the contemptuous captive, and
Ruspak at last left him and went away, mumbling to himself and
licking his lips in anticipation.
Bomba turned to Casson and Hondura, who were seated near by.
He hoped that they had not heard all that Ruspak had said. But the
tears in the faded eyes of Casson showed that he had heard all too
clearly and that his heart was wrung with anguish.
“Do not mind him,” the lad soothed the old man, as he patted him on
the shoulder. “He speaks big words, but they are like the wind in the
trees. If my hands had not been bound, it would have been a bad
thing for Ruspak.”
“He has a black heart and a tongue that is as bitter as the aloe
plant,” said Hondura.
Bomba glanced around to see that none of the sentries were
observing him.
“Hondura,” he said, “slip your hand under the puma skin that covers
my chest, reach up near my neck and tell me what you find.”
Hondura did so, and drew back his hand quickly as it touched
something hard and sharp.
“It is your machete,” he whispered.
“Yes,” replied Bomba in the same low tone. “I hung it there in a
noose when I heard the headhunters were coming. After they had
bound my hands, they were in such a hurry to get away from the
witch, Sobrinini, that they did not search me. They thought of it
afterward, but when they looked for it in my belt it was gone, and
they thought I had lost it or left it in Sobrinini’s house. But it is here,
and it will be a good friend to Bomba.”
Hondura’s eyes lighted up as he grunted his satisfaction.
“It may yet find the heart of Nascanora,” he said.
“Perhaps,” assented Bomba. “But first the hands of Bomba must be
free. When it is dark, Hondura will take the knife and cut the bonds of
Bomba, not all the way, or the guards may notice, but so near
through that Bomba can burst them when he wills.”
“Hondura will do so,” promised the Araos chief.
The tropic night soon fell and the darkness was made more intense
than usual by the absence of moon or stars. A great storm was
gathering. Claps of thunder deafened their ears and vivid lightning
flashes shot across the sky.
Before long the windows of heaven were opened, and the rain came
down in a deluge. It was a veritable cloudburst.
There was a shedlike structure in the stockade, used for storage of
fodder for the cattle, and into this the prisoners huddled, finding
some shelter from the fury of the elements.
For hours the torrential rain persisted. All that time Bomba’s brain
was at work thinking out plans of escape, rejecting one, seizing on
another, and weighing the chances of all. The case was desperate,
but his spirit was indomitable.
Presently he noted a change in the sound of the cataract. The rains
had swelled it tremendously, and its roar had increased. But it was
not this that the jungle lad especially noted. It was a series of sharp
reports, of splintering crashes, of jars that shook the earth, that
caused him to listen in wonder.
Then he heard a loud screaming as of men and women in panic, a
rushing of many feet and hoarse shouts that sent the guards
scurrying from their posts in terror.
“The rocks of the falls are breaking! The cataract is coming down on
the village! Run! Run! Run!”
CHAPTER XXIII
A MAD STAMPEDE
Bomba was on his feet instantly, his mind working with precision and
rapidity.
He sensed in a moment the full meaning of the calamity and the
advantages that he and the other captives might reap from it.
The enormous bulk of water that had swelled the volume of the
cataract from the rain had broken the rocks that formed its brink.
These had given way so that the course of the cataract had
changed, and part of the water that had previously fallen into the
gorge was now sweeping down on the doomed village.
In accordance with his promise, Hondura had severed the boy’s
bonds so that only a single strand was left. This he snapped like
thread.
The guards had gone, forgetting all about the prisoners in the wild
instinct of self-preservation. They had joined the rabble that were
now rushing from their huts and through the passageways between,
only intent for the moment on getting away from the waters that
threatened to overwhelm them.
Bomba called Hondura and Pipina to his side.
“The gods have been good to us,” he cried. “We must go now and go
quickly. They will not think of us until their fright is over. Hondura, get
your people and lead them out. Pipina, take care of Casson. I will
take Pirah—carry her if necessary—and go in front. Keep close to
me.”
In a twinkling his orders were carried out. The prisoners, stirred to
new life by this unexpected chance of escape after all hope had
been lost, responded to the call of their chief, hurried out of the
stockade and mingled with the frantic, fleeing headhunters.
Not the slightest notice was taken of them by their captors. The night
was very dark, and in their excitement it was impossible for the
headhunters to distinguish friend from foe. All thought was lost save
that of getting away from the doom that threatened them.
Bomba’s marvelous sense of direction stood him in good stead. Dark
as it was, he knew exactly the way he meant to go.
Luckily it was not the way in which the majority of the panic-stricken
people had chosen. They were pressing toward the north. Bomba’s
plan was to go toward the south, retracing the path they had followed
that afternoon.
This had a double advantage. With every step he would be widening
the distance between the prisoners and their captors. If he could
once win clear of the crowd, he and his companions would have a
whole night’s start in case of pursuit.
Then, too, he felt sure that by this time the people of Hondura’s tribe,
with what auxiliaries they could have mustered, had set out to rescue
their chief. At any time now they might be met coming, and coming in
such force that they would have a good chance for victory, if it came
to a fight with the headhunters.
Bomba hurried on in the lead, protecting and shielding little Pirah in
every way he could. Pipina and Casson were close behind, and the
rest of the prisoners, led by Hondura, followed at their heels.
The party of captives had almost reached the end of the straggling
village when a huge figure loomed up before them. He was
hastening in a direction opposite to them, but not at such a headlong
pace, as though he had a certain dignity to maintain which forbade
too much yielding to fright.
Bomba could not see his face, but he knew that there was but one
such towering figure in the tribe. It was Nascanora!
Bomba handed over Pirah to Hondura. Then he felt for his knife.
He still kept up his pace, hoping to pass the chief without being
noticed. But there was something in his stride or form that aroused
the chief’s suspicions.
“Stop!” he commanded, barring the way and stooping down to peer
into the boy’s face.
Bomba had pulled out his knife from its hiding place by the blade. He
had no time to grasp the hilt, but with all the power in his muscular
arm he swung the heavy weapon, and the iron haft struck Nascanora
right between the eyes. The giant chief went down as though he had
been hit by an axe.
Like a flash, Bomba dragged him out of the road and threw him into
the bushes at the side.
“Better make sure with the point of the knife,” suggested Hondura.
“No,” said Bomba, “I will not kill a man who cannot fight. He will not
wake till morning, and then we shall be far from here.”
His hopes were higher now as he pressed on. His one fear had been
that Nascanora might rally his people and pursue his former
prisoners. That fear now had vanished. Without their chief the
headhunters would be confused and bewildered, and, not knowing
what to do, would probably do nothing.
But now another enemy threatened. The waters of the cataract that
had already wiped out most of the village were expanding into the
open country. Already it was lapping at the fugitives’ heels, as
though determined to draw them back and overwhelm them. It
retarded their progress. Their feet stuck in the clammy ooze. The
water kept rising higher and higher. It reached their ankles. It
reached their knees. It seemed as though it were destined to
conquer.
Then, just when it seemed that hope must be abandoned, an
inspiriting cry came from Bomba.
“The road is leading upward!” he shouted. “We are coming to a hill!
The waters shall not have us!”
There was a jubilant chorus of shouts as the party struck the incline,
and in a few minutes they were on ground above the swirling waters
of the mighty river. The Giant Cataract had reached out for them, but
they had eluded its grasp!
It was an exhausted but happy throng of refugees that sank down
upon the slope as soon as they had reached a safe distance.
Their situation had changed as though by the waving of a magician’s
wand. Two hours before they had been helpless victims in the hands
of the headhunters, doomed to torture and to death. Now their
enemies were scattered, demoralized, fleeing for their lives from an
enemy as pitiless as themselves.
The rain had ceased now, and the traveling promised to be easier.
Bomba gave them a little time to rest, and then the journey was
resumed.
The lake that now extended between them and their enemies was
another element in their favor. It would be some time before the
waters would subside so as to make pursuit possible.
All through the night the little party pressed on, and not until the first
glimmer of dawn appeared in the eastern sky did they stop to make
camp and obtain a much needed rest on the banks of the River of
Death.
While the Indians scurried around in the forest to find jaboty eggs,
nuts, and fruit for the morning meal, Bomba climbed a great tree on
the bank of the river to look back on the trail they had traversed.
From the top he could see for many miles. His keen eyes scanned
the horizon, but could detect no traces of pursuers.
With his heart temporarily at rest, he was about to descend when he
became conscious of a swaying, rocking motion of the tree. At the
same moment a shout came from below:
“The tree is falling! Come down! Quick!”

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Corporations Partnerships Estates and

Solution Manual: https://testbankpack.com/p/solution-manual-for-

Test Bank: https://testbankpack.com/p/test-bank-for-south-western-

CORPORATIONS: REDEMPTIONS AND LIQUIDATIONS

SOLUTIONS TO PROBLEM MATERIALS

redemption or for a sale to a third party.

7. (LO 1) To qualify as a disproportionate redemption, the shareholder’s ownership interest in the

• Whether the redemption qualifies for sale or exchange treatment.

• Whether Barry is related to any shareholder of Pheasant Corporation.

• If Barry is related to a shareholder of Pheasant, will he continue employment with the

are sold, whether any would be sold to related parties.

• Due date of estate tax return.

b. The distribution qualifies as a disproportionate redemption; thus, Shonda has a recognized

TAX FILE MEMORANDUM

c. The redemption can qualify as a complete termination redemption. Dean’s employment as

d. The redemption cannot qualify as a complete termination redemption. Angelica is deemed to

There was a chorus of frightened exclamations and a wild scattering

The old man sobbed as he hugged the lad to his breast.

From a great bluff, hundreds of feet in height, a huge torrent of

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