Questions:
Assumptions: Phoenix Corporation is owned entirely by two individuals, Art and Bob (who are unrelated unless otherwise stated). Art owns 60,000 shares of Phoenix common stock (bought in one transaction for $600,000). Bob owns 40,000 shares of Phoenix common stock (with a basis of $30 per share). The fair market value of the Phoenix stock is $20 per share.
Phoenix's earnings and profits are $500,000. It uses the accrual method of accounting.
What are the results to the parties from the alternative transactions in (1) through (9) below (i.e., the amount and character of shareholder income or loss and the earnings and profits impact)? Each question should be reproduced in bold italic type, followed by your answer in normal type. They should simply be sufficient to answer the questions.
(1) Art sells 10,000 Phoenix shares to Bob for $200,000. Alternatively, what should Art do if 50,000 of Art's shares have a $10 per share basis and the other 10,000 shares have a $20 per share basis? Are there any circumstances in which this sale could be a redemption?
(2) Art sells 30,000 shares back to Phoenix for $600,000.
(3) Art sells 20,000 shares back to Phoenix for $400,000.
(4) What would result to Bob if Phoenix redeems 10,000 of Bob's shares for $200,000? What is the minimum number of shares that Bob must have redeemed to ensure sale or exchange treatment?
(5) Art sells 10,000 shares back to Phoenix for $200,000.
(6) Art sells 30,000 shares back to Phoenix for $600,000. Shortly thereafter, Bob sells 10,000 shares back to Phoenix for $200,000 in an exchange that had been agreed to in the preceding year. What would result to Bob? What would result to Art if Bob sold 11,000 shares, rather than 10,000?
(7) In one transaction, Art sells 20,000 Phoenix shares to Bob for $400,000 and 10,000 shares back to Phoenix for $200,000.
(8) Art sells 30,000 shares back to Phoenix for $600,000. What would result if Art and Bob are "related" in the following alternative ways?
(a) Bob is Art's brother, and their father is living.
(b) Bob is Art's equal partner in a two-person partnership.
(c) Bob is a corporation in which Art owns one half of the stock.
(d) Art is a trust of which Bob is the sole income beneficiary for Bob's life.
Query: Would Art's shares be attributed to Bob? Could Phoenix be an Scorporation?
(e) Art has an option to buy Bob's shares.
(9) If Art and Bob each own 50,000 shares, rather then 60,000 shares and 40,000 shares, respectively, how many shares will Art and Bob each own by attribution?
Assume no relationships other than as shareholders.