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

If a parent corporation makes a § 338 election,the subsidiary recognizes gains and losses as result of a deemed sale of its assets.

The stock in Black Corporation is owned entirely by Nancy (80%)and Wanda (20%),mother and daughter.Three years ago,Nancy contributed land (basis of $200,000,fair market value of $250,000)to Black Corporation in a transaction that qualified under § 351.In the current year and pursuant to a complete liquidation of Black,the land is distributed proportionately to Nancy and Wanda.At the time of the liquidating distribution,the land had a fair market value of $100,000.What amount of loss will Black Corporation recognize on the distribution of the land?

Yellow Corporation and Green Corporation enter into a "Type A" reorganization.Raul currently holds a 15-year $100,000 Green bond paying 6% interest.In exchange for his Green bond,Raul receives a 5-year $125,000 Yellow bond paying 5% interest.Raul is happy with the Yellow bond because,even though it pays a lower interest rate,the yield provides slightly more interest than the Green bond,and both bonds mature on the same date.How does Raul treat this transaction on his tax return?

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

One of the tenets of U.S.tax policy is to encourage business development.Which of the following Code sections does not support this tenet?

If the target corporation in a reorganization has a deficit in earnings and profits,any gains recognized by the shareholders are treated as stock redemptions and not as dividends.

When planning a corporate reorganization,the tax laws should be considered only after the reorganization has been structured.

Originally the courts (in opposition to Congress)determined that businesses should be able to restructure without being subject to taxation.To be consistent with court findings,Congress changed the Code to provide reorganizations with treatment similar to that given under § 351 for starting a corporation.

All of the following statements are true about gains recognized in a corporate reorganization except:

In corporate reorganizations in which the target receives property other than stock,gains but not losses can be recognized.

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

Penguin Corporation purchased bonds (basis of $95,000)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 $100,000 (basis of $110,000)to Penguin.Which of the following statements is correct with respect to the distribution of land?

Lyon has 100,000 shares outstanding that are worth $10 per share.It uses 32% of its stock plus $80,000 to acquire Zebra Corporation in a "Type A" reorganization.Zebra's assets are valued at $400,000 and its accumulated earnings and profits are $25,000 at the time of the reorganization.The Lyon shares and cash are distributed to the Zebra shareholders as follows.Jake (owning 62.5% of Zebra)receives 18,000 shares (value $180,000)and $70,000.Kara (owning 320.5% of Zebra)receives 14,000 shares (value $140,000)and $10,000.Jake and Kara each recognize gains to the extent of the cash they received.What is the character of Jake's and Kara's gains?

The stock in Black Corporation is owned by Sam and Susan,who are unrelated.Sam owns 60% and Susan owns 40% of the stock in Black Corporation.All of Black Corporation's assets were acquired by purchase.The following assets are to be distributed in complete liquidation of Black Corporation:

Describe the requirements for and tax consequences of a § 338 election.

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?

Debt security holders recognize gain when the principal amount of the securities received is greater than the principal amount given up.

Compare the sale of a corporation's assets with a sale of its stock in terms of problems to the seller.

The stock of Brown Corporation (E & P of $680,000)is owned as follows: 95% by Black Corporation (basis of $380,000),and 5% by Susanna (basis of $20,000).Both shareholders purchased their shares in Brown five years ago.In the current year,Brown Corporation liquidates and distributes land (fair market value of $950,000,basis of $550,000)to Black Corporation,and securities (fair market value of $50,000,basis of $35,000)to Susanna.Which of the following statements is incorrect with respect to the tax consequences resulting from these distributions?

Shareholders may defer gain,to the point of collection,on a liquidating distribution of installment notes obtained by the corporation in the sale of its assets.