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

One difference between the tax treatment accorded nonliquidating and liquidating distributions is with respect to the recognition of losses by the distributing corporation. As a general rule, a corporation recognizes losses on liquidating distributions of depreciated property (fair market value less than basis) but not on nonliquidating distributions of such property.

The stock of Cardinal Corporation is held as follows: 90% by Blue Jay Corporation (basis of $500,000) and 10% by Samuel (basis of $70,000).Cardinal Corporation is liquidated in October of the current year, pursuant to a plan adopted earlier in the year.Pursuant to the liquidation, Cardinal Corporation distributed Asset A (basis of $450,000, fair market value of $720,000) to Blue Jay, and Asset B (basis of $45,000, fair market value of $80,000) to Samuel.No election is made under § 338.With respect to the liquidation of Cardinal:

What are the tax consequences of a § 332 liquidation to the parent corporation, subsidiary corporation, and minority shareholder?

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

The treatment of corporate reorganizations is similar to like-kind exchanges.

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

The stock in Tangerine Corporation is held by two unrelated individuals, Janet (60%) and Joaquin (40%).One year before the liquidation of Tangerine, the shareholders transfer properties to the corporation in a transaction that qualifies under § 351.Included in that transfer was land (basis of $600,000, fair market value of $650,000).Pursuant to its liquidation in the current year, Tangerine Corporation distributes the land (now worth $500,000) pro rata to the shareholders. What amount of loss will Tangerine recognize on the distribution?

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?

If a liquidation qualifies under § 332, any minority shareholder will recognize gain or loss equal to the difference between the fair market value of assets received and the basis of the shareholder's stock.

A shareholder bought 2,000 shares of Zee Corporation for $90,000 several years ago.When the stock is valued at $200,000, Zee redeems the shares in exchange for 6,000 shares of Yea Corporation stock and a $20,000 car not wanted by Yea.This transaction meets the requirements of § 368. Which of the following statements is true with regard to this transaction?

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

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.

There are several different types of corporate reorganizations allowed by the Internal Revenue Code.Provide a brief description of each type.

The stock of Tan Corporation (E & P of $1.3 million) is owned as follows: 90% by Egret Corporation (basis of $520,000), and 10% by Zoe (basis of $55,000). Both shareholders acquired their shares in Tan more than six years ago. In the current year, Tan Corporation liquidates and distributes land (fair market value of $1.1 million, basis of $750,000) and equipment (fair market value of $700,000, basis of $410,000) to Egret Corporation, and securities (fair market value of $200,000, basis of $150,000) to Zoe. What are the tax consequences of these distributions to Egret, to Tan, and to Zoe?

Pursuant to a complete liquidation, Lilac Corporation distributes the following assets to its unrelated shareholders: land held for three years as an investment (basis of $300,000, fair market value of $600,000), inventory (basis of $100,000, fair market value of $80,000), and marketable securities held for four years as an investment (basis of $200,000, fair market value of $240,000). What are the tax consequences to Lilac Corporation as a result of the liquidation?

During the current year, Ecru Corporation is liquidated and distributes its only asset, land, to Kena, the sole shareholder. On the date of distribution, the land has a basis of $370,000, a fair market value of $550,000, and is subject to a liability of $450,000. Kena, who takes the land subject to the liability, has a basis of $50,000 in the Ecru stock. With respect to the distribution of the land, which of the following statements is correct?

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?

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 $400,000, fair market value of $350,000) and securities (basis of $20,000, fair market value of $80,000), while Ellie transferred equipment (basis of $220,000, fair market value of $430,000).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 undeveloped land that had decreased in value to $290,000 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?

The text discusses four different limitations on loss recognition by liquidating corporations. Provide a brief description of each of these loss limitations.

Section 332 does not apply to a parent-subsidiary liquidation if the subsidiary corporation is insolvent on the date of the liquidation.