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

Question 1

One similarity between the tax treatment accorded liquidating and nonliquidating distributions is with respect to a shareholder's basis in property received in such distributions. For each type of distribution, the shareholder's basis is the property's fair market value on the date of distribution.

Answer 1

True

Question 2

The related-party loss limitation applies to distributions to related parties and either the distribution is pro rata or the property distributed is disqualified property.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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.

Question 5

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 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 recognizes gain or loss on the transfer of property in satisfaction of indebtedness.

Question 7

If a parent corporation makes a § 338 election, the subsidiary corporation recognizes gain but not loss on the deemed sale of its assets on the qualified stock purchase date.

Question 8

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

Question 9

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

Question 10

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

Question 11

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 no recognized gain or loss.

Question 12

A liquidation can occur for tax purposes even though the corporation has retained some assets to pay remaining debts and preserve legal status.

Question 13

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 14

Gains and losses are recognized by the liquidating corporation on distributions to a minority shareholder in a § 332 liquidation.

Question 15

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

Question 16

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 $850,000, the same as Brown's basis in its Green stock.

Question 17

If a parent corporation makes a § 338 election, the subsidiary corporation is treated as a new corporation as of the day following the qualified stock purchase date.

Question 18

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 19

A subsidiary is liquidated pursuant to § 332. The parent has held 100% of the stock in the subsidiary for the past 10 years. The subsidiary has a net operating loss carryover of $400,000. The net operating loss does not carry over to the parent.

Question 20

Liquidation expenses incurred by a corporation are generally deductible as § 162 trade or business expenses.

Question 21

Scarlet Corporation, the parent corporation, has a basis of $600,000 in the stock of Brown Corporation, a subsidiary in which Scarlet 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 these.

Question 22

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

A) The subsidiary 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 an18-month period.
C) The parent recognizes no gain (loss) as a result of the election.
D) Gain but not loss is recognized by the subsidiary as a result of a deemed sale of its assets.
E) None of these.

Question 23

The stock of Lavender Corporation is held as follows: 80% by Jade Corporation (basis of $400,000) and 20% by Tiffany (basis of $100,000). Lavender Corporation is liquidated in December of the current year, pursuant to a plan adopted earlier in the year. Pursuant to the liquidation, Lavender Corporation distributed Asset A (basis of $600,000, fair market value of $900,000) to Jade, and Asset B (basis of $250,000, fair market value of $225,000) to Tiffany. No election is made under § 338. With respect to the liquidation of Lavender:

A) Lavender recognizes a loss of $25,000 on the distribution of Asset B.
B) Jade has a basis in Asset A of $900,000.
C) Tiffany has a basis in Asset B of $225,000.
D) Jade recognizes a gain of $500,000.
E) Lavender recognizes a gain of $300,000 on the distribution of Asset A.

Question 24

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 $200,000. Dove Corporation had purchased the land as an investment three years ago for $125,000, and the land was distributed subject to a $100,000 liability. Alexandra took the land subject to the $100,000 liability. What is her basis in the land?

A) $0
B) $100,000
C) $125,000
D) $200,000
E) None of these

Question 25

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 these

Question 26

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 these.

Question 27

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 $250,000, a fair market value of $650,000, and is subject to a liability of $500,000. Kena, who takes the land subject to the liability, has a basis of $120,000 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 $530,000.
B) Ecru Corporation recognizes a gain of $250,000.
C) Kena recognizes a gain of $30,000.
D) Kena has a basis of $250,000 in the land.
E) None of these.

Question 28

Indigo corporation 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 these.

Question 29

The stock in Rhea Corporation is owned by Jennifer (80%) and Lucy (20%), mother and daughter. In a liquidation of the corporation in the current year, Rhea distributes land that it purchased two years ago for $675,000 to Lucy. The property has a fair market value on the date of distribution of $450,000. One year later, Lucy sells the land for $400,000. What loss, if any, will Rhea Corporation recognize with respect to the distribution of land?

A) $0
B) $45,000
C) $225,000
D) $275,000
E) None of the above

Question 30

The stock in Toucan Corporation is held equally by two brothers. Four years ago, the shareholders transferred 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 31

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 these.

Question 32

Ruby Corporation has announced plans to liquidate. Bronze Corporation owns 85% of Ruby's stock. If Bronze wants to avoid the nontaxable treatment associated with a § 332 liquidation (e.g., nonrecognition of loss), it could reduce its stock ownership in Ruby to below 80%.

Question 33

The stock of Loon Corporation is held as follows: 85% by Duck Corporation and 15% by Gerald, an individual. Loon Corporation is liquidated in December of the current year pursuant to a plan adopted earlier in the year. Loon 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 Loon stock. How much gain will Loon Corporation recognize in this liquidating distribution?

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

Question 34

Pursuant to a complete liquidation, Rust Corporation distributes to its shareholders land with a basis of $150,000 and a fair market value of $400,000. The land is subject to a liability of $300,000. What is Rust's recognized gain on the distribution?

A) $0.
B) $100,000.
C) $150,000.
D) $250,000.
E) None of these.

Question 35

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) $450,000 gain
D) $570,000 gain
E) None of the above

Question 36

Last year, 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. In the current year, Crow Corporation adopted a plan of liquidation and distributed 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 by Crow 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 these.

Question 37

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 $600,000, fair market value of $450,000) and securities (basis of $70,000, fair market value of $250,000), and Ellie transferred equipment (basis of $420,000, fair market value of $700,000). 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 land that had decreased in value to $310,000 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) $140,000
C) $150,000
D) $290,000
E) None of these.

Question 38

Skylark Corporation owned 100% of the outstanding stock of Quail Corporation having purchased the stock six years ago for $200,000. Pursuant to a plan of liquidation adopted by Quail Corporation earlier in the current year, Quail distributed all its property to its shareholder. Quail Corporation had never been insolvent and had E & P of $700,000 on the date of liquidation. Pursuant to the liquidation, Quail distributes property worth $650,000 (basis $340,000) to Skylark Corporation. How much gain must the parties recognize on the transfer of this property to Skylark?

A) $0 as to both Skylark and Quail.
B) $140,000 as to Skylark.
C) $310,000 as to Quail.
D) $450,000 as to Skylark.
E) None of these.

Question 39

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) Dove must be liquidated pursuant to the § 338 election.
C) Dove is treated as having sold its assets on the qualified stock purchase date.
D) Dove can recognize gain or loss as a result of the § 338 election.
E) None of these.

Question 40

The stock of Tan Corporation (E & P of $1.5 million) is owned as follows: 90% by Egret Corporation (basis of
$900,000), and 10% by Zoe (basis of $70,000). 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 $1.3 million) 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 $260,000) to Zoe. What are the tax consequences of these distributions to Egret, to Tan, and to Zoe?

Question 41

Individual shareholders would prefer to have a gain on a corporate reorganization treated as a capital gain rather than as a dividend, because they can reduce the amount taxable by their basis in the stock involved.

Question 42

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

Question 43

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

Question 44

A shareholder bought 10,000 shares of Coral Corporation for $50,000 several years ago. When the stock is valued at $90,000, Coral redeems the shares in exchange for 5,000 shares of Blush Corporation stock and a $10,000 Blush bond. This transaction meets the requirements of § 368. Which of the following statements is false regarding this transaction?

A) The shareholder has a realized gain of $40,000.
B) The shareholder has a postponed gain of $30,000.
C) The shareholder has a basis in the Blush stock of $60,000.
D) The shareholder has a recognized gain of $10,000.

Question 45

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

Question 46

For a corporate restructuring to qualify as a tax-free reorganization, the step transaction doctrine must apply.

Question 47

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

Question 48

A tax-free corporate reorganization can be utilized to:

A) Transfer assets in a bankruptcy.
B) Resolve management issues by dividing a company into three new companies.
C) Combine four corporations into one.
D) Create a subsidiary.
E) All the above results are possible.

Question 49

The tax treatment of reorganizations almost parallels the Federal income tax treatment for like-kind exchanges.

Question 50

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

Question 51

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 will recognize gains but not losses.
E) None is true.

Question 52

Target shareholders recognize gain or loss when they receive assets (boot) as well as stock in the acquiring corporation in a transaction meeting the § 368 requirements.

Question 53

All 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 these are true.

Question 54

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

Question 55

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 be 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) None is true.

Question 56

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

Question 57

The basis for the acquiring corporation in the target's assets is increased by any gain recognized by the target.

Question 58

On March 15, 2018, Blue Corporation purchased 10% of the Gold Corporation stock outstanding. Blue Corporation purchased an additional 40% of the stock in Gold on October 24, 2018, and an additional 25% on April 4, 2019. On July 25, 2019, Blue Corporation purchased the remaining 25% of Gold Corporation stock outstanding.
a. For purposes of the § 338 election, on what date does a qualified stock purchase occur?
b. What is the due date for making the § 338 election?

Question 59

Bobcat Corporation redeems all of Zed's 4,000 shares and distributes to him 2,000 shares of Van Corporation stock plus $50,000 cash. Zed'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 of Van are $75,000. How does Zed treat this transaction for tax purposes?

A) Zed recognizes no gain in this reorganization.
B) Zed reports a $50,000 recognized dividend.
C) Zed reports a $50,000 recognized capital gain.
D) Zed reports a $40,000 recognized dividend and a $10,000 capital gain.

Question 60

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

Question 61

Cotinga Corporation is acquiring Petrel Corporation through a "Type C" reorganization by exchanging 20% of its voting stock and $50,000 for all of Petrel's assets (value of $800,000 and basis of $600,000) and liabilities ($100,000). Jerrika owns 48% of Petrel (basis $270,000), and Allen owns the remaining 52% (basis $380,000). They exchange their stock in Petrel for their proportionate shares of the Cotinga stock and cash. What is the value of the Cotinga stock received by Jerrika and Allen? What are the amounts of gains/losses each recognizes due to the reorganization? What is Jerrika's and Allen's basis in the Cotinga stock?

Question 62

Briefly describe the Federal judicial doctrines that may apply to tax-free corporate reorganizations.

Question 63

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 64

Acquiring Corporation transfers $500,000 stock and land with a value of $400,000 (basis of $250,000) to Target for most of its assets. The assets not acquired in the "Type A" reorganization are distributed to Target's shareholder, Tia. They are valued at $100,000 (basis of $120,000). Acquiring stock and the land also are distributed to Tia in exchange for her stock in Target. Tia's basis in her stock is $650,000. What is the gain or loss recognized by Acquiring, Target, and Tia on this restructuring? What is Tia's basis in the Acquiring stock?

Question 65

Dipper Corporation is acquiring Bulbul Corporation by exchanging 220,000 shares of Dipper stock and $80,000 cash for all of Bulbul's assets (valued at $500,000), liabilities ($200,000), and accumulated earnings and profits ($120,000). Betty purchased 40% of Bulbul five years ago for $60,000, and Keith purchased the remaining 60% for $90,000.
What is the amount of the gain or loss (if any) that Betty and Keith recognize, assuming that the exchange qualifies as a § 368 reorganization? What is the basis in their new Dipper stock?

Question 66

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 these.

Question 67

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?