Question 1

In a complete liquidation, a liability assumed by a shareholder reduces the shareholder's amount realized.

Accepted Answer

When a shareholder assumes a liability in a complete liquidation, it reduces the amount the shareholder receives as a distribution or amount realized. This is because the liability assumed by the shareholder is considered a reduction in the value of the shareholder's interest in the liquidating corporation.

Question 2

A subsidiary must recognize depreciation recapture income when the subsidiary is liquidated into the parent.

Accepted Answer

Depreciation recapture income is recognized when an asset is sold for more than its book value, not specifically upon the liquidation of a subsidiary into its parent. Liquidation involves settling debts and distributing assets, which may or may not involve selling assets that could lead to depreciation recapture.

Question 3

A plan of liquidation must be reduced to writing in order to be accepted by the Internal Revenue Service.

Accepted Answer

False

Question 4

Liquidation and dissolution have the same legal meaning.

Accepted Answer

Liquidation refers to the process of selling off assets to repay debts or distribute profits, while dissolution refers to the formal process of ending a company's existence by canceling its registration and legal standing. While liquidation is often a step in the dissolution process, the two terms have different legal meanings.

Question 5

Riverwalk Corporation is liquidated, with Juan receiving $5,000 in money, other property having a $6,000 FMV, and a $1,000 mortgage on the property. Juan's basis in his River walk stock is $8,000. Upon liquidation, Juan must recognize a gain of

Accepted Answer

To calculate the gain, we first need to determine the amount realized by Juan. The amount realized is the sum of the money received ($5,000) and the fair market value of the property received ($6,000), minus any liabilities assumed (in this case, the $1,000 mortgage).

Amount realized = $5,000 + $6,000 - $1,000 = $10,000

Next, we need to subtract Juan's basis in his Riverwalk stock from the amount realized to determine the gain.

Gain = Amount realized - Basis 
Gain = $10,000 - $8,000 = $2,000

Therefore, Juan must recognize a gain of $2,000 upon liquidation.

Question 6

A subsidiary recognizes no gain or loss on a distribution to a parent corporation owning more the majority of the subsidiary's stock in a complete liquidation.

Accepted Answer

The answer of A subsidiary recognizes no gain or loss...

Question 7

Generally, a corporation recognizes a gain, but not a loss, on a liquidating distribution.

Accepted Answer

A corporation can recognize both gains and losses on liquidating distributions. The recognition of gain or loss depends on whether the fair market value (FMV) of the property distributed is more or less than the adjusted basis of the property to the corporation. If the FMV is more than the adjusted basis, the corporation recognizes a gain. If the FMV is less than the adjusted basis, the corporation recognizes a loss.

Question 8

The liquidation of a subsidiary corporation must be completed within one tax year to receive nonrecognition treatment.

Accepted Answer

The liquidation of a subsidiary does not need to be completed within one tax year to receive nonrecognition treatment under certain sections of the Internal Revenue Code, such as Section 332, which allows for a tax-free liquidation of a subsidiary if certain conditions are met, without specifying a one-year completion requirement.

Question 9

Moya Corporation adopted a plan of liquidation last year. All but a nominal amount of Moya's assets are distributed to its shareholders within the year. Which of the following statements is not true?

Accepted Answer

Liquidation does not necessarily mean dissolution. Dissolution is the legal process of ending a corporation's existence, while liquidation refers to the sale or distribution of a corporation's assets. In this scenario, Moya Corporation still retains its state charter and its existence is preserved, even though it has been liquidated for tax purposes.

Question 10

Section 336 prevents recognition of a loss when making a pro rata distribution of property to a related person.

Accepted Answer

Section 336 of the Internal Revenue Code generally deals with the recognition of gain or loss by a corporation on the distribution of property in complete liquidation. It does not specifically prevent the recognition of a loss when making a pro rata distribution of property to a related person. The limitation on loss recognition in certain related-party transactions is more directly addressed by other provisions, such as Section 267 or Section 707(b), depending on the context.

Question 11

Riverwalk Corporation is liquidated, with Juan receiving $5,000 in money and other property having a $6,000 FMV. Juan's basis in his Riverwalk stock is $8,000. Upon liquidation, Juan must recognize a gain of

Accepted Answer

In a corporate liquidation, the amount of gain or loss recognized is the difference between the amount of money and the FMV of the property received and the shareholder's adjusted basis in their stock. In this case, Juan received $5,000 in money and property with an FMV of $6,000, for a total of $11,000. His adjusted basis in his stock was $8,000. Therefore, Juan must recognize a gain of $3,000 ($11,000 - $8,000).

Question 12

The adjusted basis of property received in a complete liquidation is its fair market value on the distribution date.

Accepted Answer

According to IRS regulations, the adjusted basis of property received in a complete liquidation is its fair market value on the distribution date. This is because the fair market value represents the value of the property at the time it was received and serves as a basis for calculating any potential gain or loss in future transactions involving the property.

Question 13

Identify which of the following statements is false.

Accepted Answer

A) Tax attributes of the liquidating corporation generally do not carry over to the shareholders under general liquidation rules. B) The special liquidation rules under Secs. 332 and 337 do not automatically allow for a tax-free liquidation merely based on the corporation being formed in a Sec. 351 exchange; specific conditions must be met. C) "Liquidation" and "dissolution" are related but distinct terms; liquidation refers to the process of winding up the corporation's affairs, including paying off debts and distributing remaining assets, while dissolution is the legal end of the corporation's existence.

Question 14

Texas Corporation is undergoing a complete liquidation and distributes land to Robert, one of its shareholders, in exchange for all of Robert's stock. The land has a basis of $300,000 and an FMV of $400,000 on Texas Corporation's books and is subject to a $325,000 liability. Robert assumes the liability on the property. Robert's basis in his Texas Corporation stock is $100,000. What is the amount of gain or loss recognized by Robert on the distribution?

Accepted Answer

The amount realized by Robert is the liability assumed, which is $325,000. His basis in the stock surrendered is $100,000, resulting in a recognized loss of $225,000. The FMV of the land is not relevant since it is not used to calculate gain or loss in a complete liquidation.

Question 15

When a corporation liquidates, it performs three activities. What is the general order of these activities in a plan of liquidation?

Accepted Answer

The general order of activities in a plan of liquidation for a corporation is to first wind up its affairs, which includes ceasing operations and selling assets. Then, it pays off its debts with the proceeds. Finally, any remaining property or assets are distributed to the shareholders.

Question 16

In general, a noncorporate shareholder that receives a distribution in complete liquidation of the liquidating corporation recognizes his or her entire realized gain as a capital gain.

Accepted Answer

This is true according to the tax code. Noncorporate shareholders that receive distributions in complete liquidation of the corporation recognize the entire realized gain as a capital gain. This is because the liquidation of a corporation triggers a deemed sale of the shareholder's stock, resulting in a capital gain or loss.

Question 17

Liquidation rules generally are applied the same to the following organizations except for

Accepted Answer

The answer of Liquidation rules generally are applied the same...

Question 18

A corporation is required to file Form 966 within 30 days after the adoption of a plan of liquidation.

Accepted Answer

This statement is true according to IRS regulations.

Question 19

In a complete liquidation of a corporation, which of the following is false?

Accepted Answer

Liquidation refers to the process of selling off a company's assets to pay creditors and distributing the remaining assets to the shareholders, which leads to the corporation ceasing operations and canceling its stock. However, liquidation does not necessarily mean the corporation has undergone dissolution. Dissolution is a separate legal process that involves the formal disbanding of a corporation, which may or may not follow liquidation.

Question 20

Liquidating expenses are generally deducted as ordinary and necessary business expenses.

Accepted Answer

Liquidating expenses, which involve the disposal or sale of assets, are typically considered ordinary and necessary business expenses and can be deducted accordingly.

Quiz 6: Corporate Liquidating Distributions