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

Obtaining a positive letter ruling from the IRS can ensure the desired tax treatment for parties contemplating a corporate reorganization.

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:

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

The Federal income tax treatment of a corporate restructuring is an extension of allowing entities to form without taxation.

Acquiring Corporation transfers $500,000 stock and land with a value of $400,000 (basis of $250,000) to Target for most of its assets.The assets not acquired in the "Type A" reorganization are distributed to Target's shareholder,Tia.They are valued at $100,000 (basis of $120,000).Acquiring stock and the land also are distributed to Tia in exchange for her stock in Target.Tia's basis in her stock is $650,000.What is the gain or loss recognized by Acquiring,Target,and Tia on this restructuring? What is Tia's basis in the Acquiring stock?

For a corporate restructuring to qualify as a tax-free reorganization,the step transaction doctrine must apply.

Liquidation expenses incurred by a corporation are generally deductible as § 162 trade or business expenses.

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.

Which of the following statements is correct with respect to the § 338 election?

Brown Corporation purchased 85% of the stock of Green Corporation five years ago for $850,000.In the current year,Brown Corporation liquidates Green Corporation and acquires assets with a basis to Green Corporation of $700,000 (fair market value of $1.1 million).Brown Corporation will have a basis in the assets of $850,000,the same as Brown's basis in its Green stock.

The related-party loss limitation in a complete liquidation applies only to distributions of property while the built-in loss limitation can apply to a distribution or sale of property.