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

During the current year,Goldfinch Corporation purchased 100% of the stock of Dove Corporation and made a qualified election under § 338.Which of the following statements is incorrect with respect to the § 338 election?

Indigo has a basis of $1 million in the stock of Owl Corporation,a subsidiary in which it owns 100% of all classes of stock.Indigo purchased the stock in Owl 10 years ago.In the current year,Indigo liquidates Owl and acquires assets worth $1.2 million.At the time of its liquidation,Owl Corporation had a basis of $800,000 in the assets and E & P of $500,000.Which of the following statements is correct with respect to the liquidation?

If a parent corporation makes a § 338 election,the subsidiary corporation recognizes gain but not loss on the deemed sale of its assets on the qualified stock purchase date.

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 stock in Rhea Corporation is owned by Jennifer (80%) and Lucy (20%),mother and daughter.In a liquidation of the corporation in the current year,Rhea distributes land that it purchased two years ago for $675,000 to Lucy.The property has a fair market value on the date of distribution of $450,000.One year later,Lucy sells the land for $400,000.What loss,if any,will Rhea Corporation recognize with respect to the distribution of land?

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?

Magenta Corporation acquired land in a § 351 exchange one year ago.The land had a basis of $320,000 and a fair market value of $350,000 on the date of the transfer.Magenta Corporation has two shareholders,Mark (70%) and Megan (30%),who are brother and sister.Magenta Corporation adopts a plan of liquidation in the current year.On this date,the land has decreased in value to $250,000.Magenta Corporation sells the land for $250,000 and distributes the proceeds pro rata to Mark and Megan.What amount of loss may Magenta Corporation recognize on the sale of the land?

Individual shareholders would prefer to have a gain on a corporate reorganization treated as a capital gain rather than as a dividend,because they can reduce the amount taxable by their basis in the stock involved.

Scarlet Corporation,the parent corporation,has a basis of $600,000 in the stock of Brown Corporation,a subsidiary in which it owns 90% of all classes of stock.Scarlet purchased the stock in Brown Corporation 10 years ago.In the current year,Scarlet Corporation liquidates Brown Corporation and acquires assets worth $800,000 and with a tax basis to Brown Corporation of $950,000.What basis will Scarlet Corporation have in the assets acquired from Brown Corporation?

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?

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.

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?

Yoko purchased 10% of Toyger Corporation's stock six years ago for $70,000.In a transaction qualifying as a "Type C" reorganization,Yoko received $50,000 cash and 8% of Angora Corporation's stock (valued at $100,000) in exchange for her Toyger stock.Prior to the reorganization,Toyger had $200,000 accumulated earnings and profits and Angora had $300,000.How does Yoko treat the exchange for tax purposes?

Compare the sale of a corporation's assets with a sale of its stock from the perspective of the seller.

Purple Corporation has two equal shareholders,Joshua and Ellie,who are father and daughter.One year ago,the two shareholders transferred properties to Purple in a § 351 exchange.Joshua transferred land (basis of $600,000,fair market value of $450,000) and securities (basis of $70,000,fair market value of $250,000),while Ellie transferred equipment (basis of $420,000,fair market value of $700,000).In the current year,Purple Corporation adopts a plan of liquidation,sells all of its assets,and distributes the proceeds pro rata to Joshua and Ellie.The only loss realized upon disposition of the properties was with respect to the land that had decreased in value to $310,000 and was sold for this amount.Purple never used the land for any business purpose during the time it was owned by the corporation.What amount of loss can Purple Corporation recognize on the sale of the land?

All of the following statements are true about corporate reorganization except:

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.

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.

One similarity between the tax treatment accorded liquidating and nonliquidating distributions is with respect to a shareholder's basis in property received in such distributions.For each type of distribution,the shareholder's basis is the property's fair market value on the date of distribution.

The tax treatment of reorganizations almost parallels the Federal income tax treatment for like-kind exchanges.