Question 1

Since debt security holders do not own stock, they do not fall under the corporate reorganization rules.

Accepted Answer

A) True 
 B)False  False

Question 2

What will cause the corporations involved in a § 368 reorganization to recognize gain or loss? What will cause shareholders of the companies involved in the corporate reorganization to recognize gain or loss? If gain is recognized by shareholders, what are the different tax character possibilities?

Accepted Answer

Corporations involved in § 368 reorganizations are not permitted to recognize losses. The acquiring corporation can recognize gain if it transfers appreciated property (boot) along with its stock to the target. The target will recognize gain if it fails to distribute the boot to its shareholders. The target also can recognize gain if it distributes its own appreciated property to its shareholders.
Shareholders will recognize gains when they receive boot (non-stock property) in exchange for their stock in their corporation. Shareholders can recognize losses if they only receive boot and no stock.
Shareholder recognized gain in a corporate reorganization may have the following tax characters.
-Dividend to the extent of the shareholder's proportionate share of corporate earnings and profits (E & P). The remaining gain is capital gain.
-If the requirements of § 302(b) can be met, the transaction will qualify for stock redemption treatment, which is capital gain treatment.

Question 3

Explain whether shareholders are exempted from gain/loss recognition in nontaxable corporate reorganization or the gain/loss recognition is merely postponed. If postponed, what is the vehicle for ensuring the postponed gain/loss will be recognized in the future?

Accepted Answer

In reorganizations neither gain nor loss is recognized by the shareholders as long the corporations meet the legislative and judicial requirements for nontaxable treatment. However, this does not mean that the shareholders are exempted from taxation. Rather, the recognition of the gain/loss is merely postponed until there is a taxable transaction.
The vehicle for postponing gain/loss that is not recognized is the basis in the new stock received. If no gain or loss is recognized, the basis in the new stock is carried over from the basis in the old stock. If gain is recognized because the shareholder received "boot," the basis in the new stock is adjusted to account for the remaining gain realized but not recognized (postponed gain). The four-column template of Concept Summary 7.1 is useful for determining the consequences of a corporate reorganization.

Question 4

After a complete liquidation has been adopted, Wren Corporation sells its only asset, unimproved land (basis of
$200,000) held as an investment. The land is sold to Seth (an unrelated party) for $500,000. Under the terms of the sale, Wren Corporation receives cash of $50,000 and Seth's notes for the balance of $450,000. The notes are payable over the succeeding 5 years ($90,000 per year) and carry an appropriate rate of interest. Immediately after the sale, Wren Corporation distributes the cash and notes to Adam, the sole shareholder of Wren. Adam has an adjusted basis of $80,000 in the Wren stock. The installment notes have a value equal to their face amount of $450,000.
a. How will Wren Corporation be taxed on the distribution?
b. How will Adam be taxed on his receipt of the cash and notes?

Accepted Answer

a. Wren Corporation may use the installm

Question 5

Dipper Corporation is acquiring Bulbul Corporation by exchanging 220,000 shares of Dipper stock and $80,000 cash for all of Bulbul's assets (valued at $500,000), liabilities ($200,000), and accumulated earnings and profits ($120,000). Betty purchased 40% of Bulbul five years ago for $60,000, and Keith purchased the remaining 60% for $90,000. What is the amount and character of the gain or loss that Betty and Keith recognize (if any), assuming that the exchange qualifies as a § 368 reorganization? What is the basis in their new Dipper stock?

Accepted Answer

Bulbul is worth $300,000 ($500,000 - $20

Question 6

The built­in loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property's
fair market value after its transfer to the corporation.

Accepted Answer

A) True 
 B)False

Question 7

One advantage of acquiring a corporation via an asset purchase instead of a stock purchase is that an asset
purchase avoids the transfer of the acquired corporation's liabilities.

Accepted Answer

A) True 
 B)False

Question 8

Target shareholders recognize gain or loss when they receive assets (boot) as well as stock in the acquiring
corporation in a transaction meeting the § 368 requirements.

Accepted Answer

A) True 
 B)False

Question 9

The amount of gain recognized by a shareholder in a corporate reorganization is based on the shareholder's
proportionate share of E & P.

Accepted Answer

A) True 
 B)False

Question 10

Discuss the role of letter rulings in corporate reorganizations.

Accepted Answer

When feasible, the parties in a corporat

Question 11

Korat Corporation and Snow Corporation enter into an acquisitive "Type D" reorganization. Xin currently holds a 20­ year, $10,000 Snow bond paying 4% interest. There are 8 years until the bond matures. In exchange for his Snow bond, Xin receives an 8 year $16,000 Korat bond paying 2.5% interest. Xin thinks this is fair because he will still receive $400 of interest each year and both bonds mature on the same date. How does Xin treat this transaction on his tax return?

Accepted Answer

A)  Xin recognizes no gain or loss on the exchange of bonds. 
B)  Xin recognizes $750 gain each year for the next 8 years. 
C)  Xin recognizes $6,000 capital gain. 
D)  Xin recognizes $6,000 ordinary gain. 
E)  None of the above. 
A)  Xin recognizes no gain or loss on the exchange of bonds. 
B)  Xin recognizes $750 gain each year for the next 8 years. 
C)  Xin recognizes $6,000 capital gain. 
D)  Xin recognizes $6,000 ordinary gain. 
E)  None of the above.

Question 12

Which of the following statements is true concerning all types of tax-free corporate reorganizations?

Accepted Answer

A)  Assets are transferred from one corporation to another. 
B)  Stock is exchanged with shareholders. 
C)  Liabilities that are assumed when cash is also used as consideration will be treated as boot. 
D)  Corporations and shareholders involved in the reorganization will recognize gains but not losses. 
E)  None of the above statements is true. 
A)  Assets are transferred from one corporation to another. 
B)  Stock is exchanged with shareholders. 
C)  Liabilities that are assumed when cash is also used as consideration will be treated as boot. 
D)  Corporations and shareholders involved in the reorganization will recognize gains but not losses. 
E)  None of the above statements is true.

Question 13

The stock of Lavender Corporation is held as follows: 80% by Jade Corporation (basis of $400,000) and 20% by Tiffany (basis of $100,000). Lavender Corporation is liquidated in December of the current year, pursuant to a plan adopted earlier in the year. Pursuant to the liquidation, Lavender Corporation distributed Asset A (basis of $600,000, fair market value of $900,000) to Jade, and Asset B (basis of $250,000, fair market value of $225,000) to Tiffany. No election is made under § 338. With respect to the liquidation of Lavender:

Accepted Answer

A)  Lavender recognizes a loss of $25,000 on the distribution of Asset B. 
B)  Jade has a basis in Asset A of $900,000. 
C)  Tiffany has a basis in Asset B of $225,000. 
D)  Jade recognizes a gain of $500,000. 
E)  Lavender recognizes a gain of $300,000 on the distribution of Asset A. 
A)  Lavender recognizes a loss of $25,000 on the distribution of Asset B. 
B)  Jade has a basis in Asset A of $900,000. 
C)  Tiffany has a basis in Asset B of $225,000. 
D)  Jade recognizes a gain of $500,000. 
E)  Lavender recognizes a gain of $300,000 on the distribution of Asset A.

Question 14

Legal dissolution under state law is required for a liquidation to be complete for tax purposes.

Accepted Answer

A) True 
 B)False

Question 15

Cotinga Corporation is acquiring Petrel Corporation through a "Type C" reorganization by exchanging 20% of its voting stock and $50,000 for all of Petrel's assets (value of $800,000 and basis of $600,000) and liabilities ($100,000). Jerrika owns 48% of Petrel (basis $270,000), and Allen owns the remaining 52% (basis $380,000). They exchange their stock in Petrel for their proportionate shares of the Cotinga stock and cash. What is the value of the Cotinga stock received by Jerrika and Allen? What are the amounts of gains/losses each recognizes due to the reorganization? What is Jerrika's and Allen's basis in the Cotinga stock?

Accepted Answer

Value of Cotinga stock received: Jerrika

Question 16

If a parent corporation makes a § 338 election, the subsidiary corporation must be liquidated.

Accepted Answer

A) True 
 B)False

Question 17

A subsidiary is liquidated pursuant to § 332. The parent has held 100% of the stock in the subsidiary for the past ten years. The subsidiary has a net operating loss carryover of $400,000. The net operating loss does not carry over to the parent.

Accepted Answer

A) True 
 B)False

Question 18

Penguin Corporation purchased bonds (basis of $190,000) of its 100% owned subsidiary, Finch Corporation, at a discount. Pursuant to a § 332 liquidation and in satisfaction of the indebtedness, Finch distributes land worth $200,000 (basis of $160,000) to Penguin. Which of the following statements is correct with respect to the distribution of land?

Accepted Answer

A)  Neither Finch nor Penguin recognize gain (or loss). 
B)  Finch recognizes no gain and Penguin recognizes a gain of $10,000. 
C)  Finch recognizes a gain of $40,000 and Penguin recognizes no gain. 
D)  Finch recognizes a gain of $40,000 and Penguin recognizes a gain of $10,000. 
E)  None of the above. 
A)  Neither Finch nor Penguin recognize gain (or loss). 
B)  Finch recognizes no gain and Penguin recognizes a gain of $10,000. 
C)  Finch recognizes a gain of $40,000 and Penguin recognizes no gain. 
D)  Finch recognizes a gain of $40,000 and Penguin recognizes a gain of $10,000. 
E)  None of the above.

Question 19

The stock in Toucan Corporation is held equally by two brothers. Four years ago, the shareholders transfer property (basis of $200,000, fair market value of $220,000) to Toucan Corporation as a contribution to capital. In the current year and pursuant to a complete liquidation of Toucan, the property is distributed proportionately to the brothers. At the time of the distribution, the property had a fair market value of $40,000. What amount of loss will Toucan Corporation recognize on the distribution of the property?

Accepted Answer

A)  $0. 
B)  $20,000. 
C)  $160,000. 
D)  $180,000. 
E)  None of the above. 
A)  $0. 
B)  $20,000. 
C)  $160,000. 
D)  $180,000. 
E)  None of the above.

Question 20

The related-party loss limitation applies to distributions to related parties and either the distribution is pro rata or the property distributed is disqualified property.

Accepted Answer

A) True 
 B)False

Exam 20: Corporations: Distributions in Complete Liquidation and an Overview of Reorganizations

Since debt security holders do not own stock, they do not fall under the corporate reorganization rules.

Explain whether shareholders are exempted from gain/loss recognition in nontaxable corporate reorganization or the gain/loss recognition is merely postponed. If postponed, what is the vehicle for ensuring the postponed gain/loss will be recognized in the future?

The built­in loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property's fair market value after its transfer to the corporation.

One advantage of acquiring a corporation via an asset purchase instead of a stock purchase is that an asset purchase avoids the transfer of the acquired corporation's liabilities.

Target shareholders recognize gain or loss when they receive assets (boot) as well as stock in the acquiring corporation in a transaction meeting the § 368 requirements.

The amount of gain recognized by a shareholder in a corporate reorganization is based on the shareholder's proportionate share of E & P.

Discuss the role of letter rulings in corporate reorganizations.

Which of the following statements is true concerning all types of tax-free corporate reorganizations?

Legal dissolution under state law is required for a liquidation to be complete for tax purposes.

If a parent corporation makes a § 338 election, the subsidiary corporation must be liquidated.

A subsidiary is liquidated pursuant to § 332. The parent has held 100% of the stock in the subsidiary for the past ten years. The subsidiary has a net operating loss carryover of $400,000. The net operating loss does not carry over to the parent.

The related-party loss limitation applies to distributions to related parties and either the distribution is pro rata or the property distributed is disqualified property.

An Introduction to Taxation and Understanding the Federal Tax Law

Working With the Tax Law

Computing the Tax

Gross Income: Concepts and Inclusions

Gross Income: Exclusions

Deductions and Losses: in General

Deductions and Losses: Certain Business Expenses and Losses

Depreciation, Cost Recovery, Amortization, and Depletion

Deductions: Employee and Self-Employed-Related Expenses

Deductions and Losses: Certain Itemized Deductions

Investor Losses

Tax Credits and Payments

Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges

Property Transactions: Capital Gains and Losses, 1231, and Recapture Provisions

Alternative Minimum Tax

Accounting Periods and Methods

Corporations: Introduction and Operating Rules

Corporations: Organization and Capital Structure

Corporations: Distributions Not in Complete Liquidation

Partnerships

S Corporations

Exempt Entities

Multistate Corporate Taxation

Taxation of International Transactions

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Income Taxation of Trusts and Estates

Filters

The builtin loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property's fair market value after its transfer to the corporation.