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

Question 1

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.

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

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

Question 5

As a general rule, a liquidating corporation recognizes gains but not losses on the distribution of property in complete liquidation.

Question 6

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.

Question 7

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.

Question 8

Sparrow Corporation purchased 90% of the stock of Warbler Corporation eight years ago for $1 million. In the current year, Sparrow liquidates Warbler and acquires assets with a basis to Warbler of $850,000 (fair market value of $1.2 million). Sparrow will have a basis in the assets of $850,000 (Warbler's basis in the assets), and a recognized loss of $150,000 ($1 million basis in Warbler stock - $850,000 carryover basis in assets).

Question 9

The related-party loss limitation does not apply to a distribution of property in complete liquidation that was appreciated (fair market value greater than basis) when it was transferred to the corporation.

Question 10

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

Question 11

Pursuant to a liquidation, Coral Corporation distributes to Lucinda, a shareholder, land (basis of $90,000, fair market value of $200,000). The land is subject to a $75,000 liability. Lucinda will have a basis of $125,000 in the land.

Question 12

A subsidiary is liquidated pursuant to § 332. The parent has held 100% of the stock in the subsidiary for the past ten years. The subsidiary has a net operating loss carryover of $400,000. The net operating loss does not carry over to the parent.

Question 13

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 $700,000, the same as Green's basis in the assets.

Question 14

A corporation generally will recognize gain or loss on a liquidating distribution of installment notes to its shareholders.

Question 15

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

Question 16

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.

Question 17

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

Question 18

A parent corporation must make the § 338 election by the fifteenth day of the third month following the close of the tax year in which a qualified stock purchase occurs.

Question 19

If a parent corporation makes a § 338 election, the subsidiary corporation must be liquidated.

Question 20

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.

Question 21

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

Question 22

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?

A)Kena recognizes a gain of $50,000.
B)Ecru Corporation recognizes a gain of $80,000.
C)Kena has a basis of $100,000 in the land.
D)Kena has a basis of $370,000 in the land.
E)None of the above.

Question 23

Pursuant to a complete liquidation, Oriole Corporation distributes to its shareholders land with a basis of $350,000 and a fair market value of $800,000.The land is subject to a liability of $920,000.What is Oriole's recognized gain or loss on the distribution?

A)$0.
B)$120,000 loss.
C)$120,000 gain.
D)$450,000 gain.
E)None of the above.

Question 24

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?

A)$0.
B)$50,000.
C)$60,000.
D)$110,000.
E)None of the above.

Question 25

Corporate shareholders would prefer to have a gain on a reorganization treated as a dividend rather than as a capital gain, because of the dividends received deduction.

Question 26

For corporate restructurings, meeting the § 368 reorganization "Type" requirements is all that needs to be considered when planning the structure of the transaction.

Question 27

In 1916, the Supreme Court decided that corporate reorganizations were substantially continuations of the prior entities and thus should not be subject to taxation.

Question 28

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?

A)$0.
B)$40,000.
C)$60,000.
D)$100,000.
E)None of the above.

Question 29

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

Question 30

Magenta Corporation acquired land in a § 351 exchange one year ago.The land had a basis of $320,000 and a fair market value of $350,000 on the date of the transfer.Magenta Corporation has two shareholders, Mark (70%) and Megan (30%), who are brother and sister.Magenta Corporation adopts a plan of liquidation in the current year.On this date, the land has decreased in value to $250,000.Magenta Corporation sells the land for $250,000 and distributes the proceeds pro rata to Mark and Megan.What amount of loss may Magenta Corporation recognize on the sale of the land?

A)$0.
B)$21,000.
C)$30,000.
D)$70,000.
E)None of the above.

Question 31

In corporate reorganizations, an acquiring corporation using property other than stock as consideration may recognize gains but not losses on the transaction.

Question 32

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

Question 33

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?

A)Lilac Corporation would recognize no gain or loss on the liquidation.
B)Lilac Corporation would recognize a net capital gain of $320,000.
C)Lilac Corporation would recognize a net capital gain of $340,000 and an ordinary loss of $20,000.
D)Lilac Corporation would recognize a net capital gain of $340,000.
E)None of the above.

Question 34

The gains shareholders recognize as a part of a corporate reorganization may be treated a dividend to the extent of the corporation's E & P.

Question 35

Since debt security holders do not own stock, they do not fall under the corporate reorganization rules.

Question 36

The determination of whether a shareholder's gain qualifies for stock redemption treatment in a corporate reorganization is based on the reduction in the percentage of the stock held in the target corporation when compared to the percentage held in the acquiring corporation.

Question 37

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?

A)$0.
B)$20,000.
C)$160,000.
D)$180,000.
E)None of the above.

Question 38

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

Question 39

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?

A)$0.
B)$80,000.
C)$90,000.
D)$170,000.
E)None of the above.

Question 40

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

Question 41

The stock in Camel Corporation is owned by Albert and Tomoko, who are unrelated.Albert owns 30% and Tomoko owns 70% of the stock in Camel Corporation. All of Camel Corporation's assets were acquired by purchase.The following assets are to be distributed in complete liquidation of Camel Corporation:

Question 42

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

A)The parent corporation makes the § 338 election.
B)A qualified stock purchase occurs when a corporation acquires, in a taxable transaction, at least 80% of the stock (voting power and value) of another corporation within a 18-month period.
C)The subsidiary corporation must be liquidated pursuant to the § 338 election.
D)Gain, but not loss, is recognized by the subsidiary as a result of a deemed sale of its assets.
E)None of the above.

Question 43

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

A)Taxable amounts for shareholders are classified as a dividend or capital gain.
B)Reorganizations receive treatment similar to corporate formations under § 351.
C)The transfers of stock to and from shareholders qualify for like-kind exchange treatment.
D)The value of the stock received by the shareholder less the gain not recognized (postponed) will equal the shareholder's basis in the stock received.
E)All of the above statements are true.

Question 44

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:

A)Cardinal Corporation recognizes a gain of $35,000.
B)Blue Jay has a basis in Asset A of $720,000.
C)Samuel recognizes no gain (or loss).
D)Blue Jay recognizes a gain of $220,000.
E)None of the above.

Question 45

After a plan of complete liquidation has been adopted, Condor Corporation sells its only asset, land (basis of $220,000), to Eduardo (an unrelated party) for $300,000.Under the terms of the sale, Condor Corporation receives cash of $50,000 and Eduardo's notes for the balance of $250,000.The notes are payable over the next five years ($50,000 per year) and carry an appropriate interest rate.Immediately after the sale, Condor Corporation distributes the cash and notes to Maria, the sole shareholder of Condor Corporation.Maria has a basis of $30,000 in the Condor stock.The installment notes have a value equal to their face amount.If Maria wishes to defer as much gain as possible on the transaction, which of the following is correct?

A)Condor Corporation recognizes no gain or loss on the distribution of the installment notes.
B)Maria recognizes a gain of $20,000 in the year of liquidation.
C)Maria recognizes a gain of $45,000 in the year of liquidation.
D)Maria recognizes a gain of $270,000 in the year of liquidation.
E)None of the above.

Question 46

Mary and Jane, unrelated taxpayers, own Gray Corporation's stock equally.One year before the complete liquidation of Gray, Mary transfers land (basis of $420,000, fair market value of $350,000) to Gray Corporation as a contribution to capital.Assume that Mary also contributed other property in the same transaction having a basis of $20,000 and fair market value of $95,000.In liquidation, Gray distributes the land to Jane.At the time of the liquidation, the land is worth $290,000.

Question 47

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?

Question 48

Scarlet Corporation, the parent corporation, has a basis of $600,000 in the stock of Brown Corporation, a subsidiary in which it owns 90% of all classes of stock. Scarlet purchased the stock in Brown Corporation 10 years ago. In the current year, Scarlet Corporation liquidates Brown Corporation and acquires assets worth $800,000 and with a tax basis to Brown Corporation of $950,000. What basis will Scarlet Corporation have in the assets acquired from Brown Corporation?

A)$0.
B)$600,000.
C)$800,000.
D)$950,000.
E)None of the above.

Question 49

Yoko purchased 10% of Toyger Corporation's stock six years ago for $70,000.In a transaction qualifying as a "Type C" reorganization, Yoko received $50,000 cash and 8% of Angora Corporation's stock (valued at $100,000) in exchange for her Toyger stock.Prior to the reorganization, Toyger had $200,000 accumulated earnings and profits and Angora had $300,000.How does Yoko treat the exchange for tax purposes?

A)As a recognized $50,000 long-term capital gain.
B)As a $50,000 dividend.
C)As a $20,000 dividend and a $30,000 capital gain.
D)As a $30,000 dividend and a $20,000 capital gain.
E)None of the above.

Question 50

The stock of Penguin Corporation is held as follows: 85% by Duck Corporation and 15% by Gerald, an individual. Penguin Corporation is liquidated in December of the current year, pursuant to a plan adopted earlier in the year. Penguin Corporation distributes land with a basis of $350,000 and fair market value of $390,000 to Gerald in liquidation of his stock interest. Gerald had a basis of $200,000 in his Penguin stock. How much gain will Penguin Corporation recognize in this liquidating distribution?

A)$0.
B)$40,000.
C)$190,000.
D)$390,000.
E)None of the above.

Question 51

Which of the following statements is true?

A)The dollar amounts involved in reorganizations are generally substantial; thus, it is important that the financial and tax treatment of the reorganization is consistent.
B)A letter ruling indicates the income tax treatment the IRS will apply to the proposed corporate restructuring transaction.
C)Careful planning can ensure that all gains recognized by individual shareholders receive beneficial dividend treatment.
D)Corporations prefer to recognize capital gains on reorganizations because they can offset the capital losses they may have.
E)None of the statements is true.

Question 52

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?

A)Xin recognizes no gain or loss on the exchange of bonds.
B)Xin recognizes $750 gain each year for the next 8 years.
C)Xin recognizes $6,000 capital gain.
D)Xin recognizes $6,000 ordinary gain.
E)None of the above.

Question 53

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?

A)The shareholder has a realized gain of $130,000.
B)The shareholder has a postponed gain of $110,000.
C)The shareholder has a basis in the Yea stock of $90,000.
D)The shareholder has a recognized gain of $20,000.
E)All of the above statements are true.

Question 54

Bobcat Corporation redeems all of Zeb's 4,000 shares and distributes to him 2,000 shares of Van Corporation stock plus $50,000 cash.Zeb's basis in his 20% interest in Bobcat is $100,000 and the stock's value is $250,000.At the time Bobcat is acquired by Van, the accumulated earnings and profits of Bobcat are $200,000 and Van's are $75,000.How does Zeb treat this transaction for tax purposes?

A)No gain is recognized by Zeb in this reorganization.
B)Zeb reports a $50,000 recognized dividend.
C)Zeb reports a $50,000 recognized capital gain.
D)Zeb reports a $40,000 recognized dividend and a $10,000 capital gain.
E)Not enough information is available to determine proper treatment.

Question 55

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

A)Assets are transferred from one corporation to another.
B)Stock is exchanged with shareholders.
C)Liabilities that are assumed when cash is also used as consideration will be treated as boot.
D)Corporations and shareholders involved in the reorganization may recognize gains but not losses.
E)None of the above statements is true.

Question 56

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?

A)$100,000.
B)$75,000.
C)$30,000.
D)$5,000.
E)None of the above.

Question 57

Indigo has a basis of $1 million in the stock of Owl Corporation, a subsidiary in which it owns 100% of all classes of stock. Indigo purchased the stock in Owl 10 years ago. In the current year, Indigo liquidates Owl and acquires assets worth $1.2 million. At the time of its liquidation, Owl Corporation had a basis of $800,000 in the assets and E & P of $500,000.Which of the following statements is correct with respect to the liquidation?

A)Owl recognizes a gain of $400,000.
B)Indigo has an $800,000 basis in the assets.
C)Owl's E & P of $500,000 is eliminated.
D)Indigo recognizes a gain of $200,000.
E)None of the above.

Question 58

Mars Corporation merges into Jupiter Corporation by exchanging all of its assets for 300,000 shares of Jupiter stock valued at $2 per share and $100,000 cash.Wanda, the sole shareholder of Mars, surrenders her Mars stock (basis $900,000) and receives all of the Jupiter stock transferred to Mars plus the $100,000. How does Wanda treat this transaction on her tax return?

A)Wanda recognizes a $100,000 gain.Her Jupiter stock basis is $900,000.
B)Wanda recognizes a loss of $100,000.Her Jupiter stock basis is $800,000.
C)Wanda recognizes a $100,000 gain.Her Jupiter stock basis is $700,000.
D)Wanda realizes a $200,000 loss of which $100,000 is recognized.Her Jupiter stock basis is $1 million.
E)None of the above.

Question 59

Penguin Corporation purchased bonds (basis of $190,000) 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 $200,000 (basis of $160,000) to Penguin.Which of the following statements is correct with respect to the distribution of land?

A)Neither Finch nor Penguin recognize gain (or loss).
B)Finch recognizes no gain and Penguin recognizes a gain of $10,000.
C)Finch recognizes a gain of $40,000 and Penguin recognizes no gain.
D)Finch recognizes a gain of $40,000 and Penguin recognizes a gain of $10,000.
E)None of the above.

Question 60

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?

A)Dove is treated as a new corporation as of the day following the qualified stock purchase date.
B)If Dove is liquidated, Goldfinch will have a basis in the assets received equal to Dove's basis in the assets.
C)Goldfinch is treated as having bought all of Dove's assets on the qualified stock purchase date.
D)Dove can recognize gain or loss as a result of the § 338 election.
E)None of the above.

Question 61

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

Question 62

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

Question 63

Compare the sale of a corporation's assets with a sale of its stock from the perspective of the seller.

Question 64

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.

Question 65

Discuss the role of letter rulings in corporate reorganizations.

Question 66

Lyon has 100,000 shares outstanding that are worth $10 per share.It uses 32% of its stock plus $80,000 to

Question 67

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?

Question 68

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

Question 69

What will cause the corporations involved in a § 368 reorganization to recognize gain or loss? What will cause shareholders of the companies involved in the corporate reorganization to recognize gain or loss? If gain is recognized by shareholders, what are the different tax character possibilities?

Question 70

Cocoa Corporation is acquiring Milk Corporation in a "Type A" reorganization by exchanging 40% of its voting stock and $50,000 for all of Milk's assets (value of $850,000 and basis of $600,000) and liabilities ($200,000).The shareholders of Milk are Elsie (650 shares) and Ferdinand (350 shares).They bought their stock for $500 per share.What is the value of the stock that Elsie and Ferdinand received from Cocoa? What is the amount of gains or losses they will recognize due to the reorganization and what is their basis in the Cocoa stock?