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

Once a gain is recognized in a corporate reorganization,its character must be determined.What are the different tax character possibilities that a corporate reorganization gain may trigger?

Brown Corporation purchased 85% of the stock of Green Corporation five years ago for $1.2 million.In the current year,Brown Corporation liquidates Green Corporation and acquires assets with a basis to Green Corporation of $800,000 (fair market value of $1.3 million).Brown Corporation will have a basis in the assets of $1.2 million,the same as Brown's basis in the Green 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 these shares in exchange for 6,000 shares of Yea Corporation stock.This transaction meets the requirements of § 368.Which of the following statements is true with regard to this transaction?

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 $300,000.Dove Corporation had purchased the land as an investment three years ago for $375,000,and the land was distributed subject to a $270,000 liability.Alexandra took the land subject to the $270,000 liability.What is Alexandra's basis in the land?

Shareholders receiving other property as a part of a corporate reorganization may be treated as having their stock redeemed under § 302(b)and be in the adverse position of being treated as having sold a capital asset.

To ensure the desired tax treatment,parties contemplating a corporate reorganization should apply for a letter ruling from the IRS.

Explain how the tax treatment for parties involved in a tax-free reorganization almost exactly parallels the treatment under the like-kind exchange provisions of § 1031.

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 undeveloped land (basis of $230,000,fair market value of $160,000)and securities (basis of $10,000,fair market value of $90,000),while Ellie transferred equipment (basis of $175,000,fair market value of $250,000).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 $120,000 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 undeveloped land?

Magenta Corporation acquired land in a § 351 exchange one year ago.The land had a basis of $400,000 and a fair market value of $480,000 on the date of the transfer.Magenta Corporation has two equal shareholders,Mark and Megan,who are father and daughter.Magenta Corporation adopts a plan of liquidation in the current year.On this date,the land has decreased in value to $360,000.Magenta Corporation sells the land for $360,000 and distributes the proceeds pro rata to Mark and Megan.What amount of loss may Magenta Corporation recognize on the sale of the land?

On April 7,2009,Crow Corporation acquired land in a transaction that qualified under § 351.The land had a basis of $480,000 to the contributing shareholder and a fair market value of $350,000.Assume that the shareholder also transferred equipment (basis of $50,000,fair market value of $200,000)in the same § 351 exchange.Crow Corporation adopted a plan of liquidation on October 6,2010.On December 8,2010,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 $300,000 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?

Section 332 will apply to a parent-subsidiary liquidation even if the subsidiary corporation is insolvent on the date of the liquidation.

Noncorporate shareholders may elect out of § 368 and recognize losses when property subject to a liability is distributed to them in a corporate reorganization.

Pursuant to a complete liquidation,Woodpecker Corporation distributes the following assets to its unrelated shareholders: land held for six years as an investment (basis of $100,000,fair market value of $300,000),inventory (basis of $100,000,fair market value of $140,000),and marketable securities held for two years as an investment (basis of $200,000,fair market value of $120,000).What are the tax results to Woodpecker Corporation as a result of the liquidation?

If a parent corporation makes a § 338 election,the subsidiary corporation need not be liquidated.

Legal dissolution under state law is not required for a liquidation to be complete for tax purposes.

For a corporate restructuring to qualify as a tax-free reorganization,the transaction must have a sound business purpose.

Which of the following is not a reorganization designated under § 368(a)(1)?

For purposes of the related-party loss limitation,"disqualified property" is defined as property that is acquired by the liquidating corporation in a § 351 or contribution to capital transaction during the two-year period ending on the date of the distribution.

If a liquidation qualifies under § 332,any minority shareholder will recognize gain (but not loss)equal to the difference between the fair market value of assets received and the basis of the shareholder's stock.

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 on October 20,2010,pursuant to a plan adopted on January 8,2010.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: