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

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?

A subsidiary corporation is liquidated at a time when it is indebted to its parent corporation. The subsidiary corporation distributes property to the parent corporation in satisfaction of the indebtedness. If the liquidation is governed by § 332, neither the subsidiary nor the parent recognize gain or loss on the transfer of property in satisfaction of indebtedness.

In the current year, Dove Corporation (E & P of $1 million) distributes all of its property in a complete liquidation. Alexandra, a shareholder, receives land having a fair market value of $100,000. Dove Corporation had purchased the land as an investment three years ago for $75,000, and the land was distributed subject to a $70,000 liability. Alexandra took the land subject to the $70,000 liability. What is Alexandra's basis in the land?

Corporate reorganizations can meet the requirements to qualify as like-kind exchanges if there is no boot involved.

The built-in 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.

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

For purposes of the § 338 election, a corporation must acquire, in a taxable transaction, at least 80% of the stock (voting power and value) of another corporation within an 12-month period.

On March 16, 2011, Blue Corporation purchased 10% of the Gold Corporation stock outstanding.Blue Corporation purchased an additional 40% of the stock in Gold on October 24, 2011, and an additional 25% on April 4, 2012.On July 23, 2012, Blue Corporation purchased the remaining 25% of Gold Corporation stock outstanding.

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?

On April 7, 2011, Crow Corporation acquired land in a transaction that qualified under § 351.The land had a basis of $400,000 to the contributing shareholder and a fair market value of $310,000.Assume that the shareholder also transferred equipment (basis of $100,000, fair market value of $200,000) in the same § 351 exchange.Crow Corporation adopted a plan of liquidation on October 5, 2012.On December 7, 2012, Crow Corporation distributes the land to Ali, a shareholder who owns 20% of the stock in Crow Corporation.The land's fair market value was $230,000 on the date of the distribution to Ali.Crow Corporation acquired the land to use as security for a loan it had hoped to obtain from a local bank.In negotiating with the bank for a loan, the bank required the additional capital investment as a condition of its making a loan to Crow Corporation.How much loss can Crow Corporation recognize on the distribution of the land?