Question 1

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

Accepted Answer

The step transaction doctrine is a legal principle used to analyze a series of formally separate steps in a transaction to determine whether they should be treated as a single integrated event for tax purposes. A corporate restructuring can qualify as a tax-free reorganization without the application of the step transaction doctrine; it must meet specific requirements outlined in the Internal Revenue Code, such as continuity of interest, business purpose, and continuity of business enterprise, among others. The step transaction doctrine is not a requirement for a reorganization to be tax-free but rather a tool that might be used to analyze the transaction.

Question 2

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 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?

Accepted Answer

The answer of Last year,Crow Corporation acquired land in a...

Question 3

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

Accepted Answer

A positive letter ruling from the IRS provides assurance that the proposed transaction will receive the desired tax treatment, allowing parties to move forward with the reorganization with confidence.

Question 4

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?

Accepted Answer

The answer of Pursuant to a complete liquidation,Oriole Corporation distributes...

Question 5

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?

Accepted Answer

The answer of Magenta Corporation acquired land in a §...

Question 6

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

Accepted Answer

The answer of Originally,the Supreme Court decided that corporate reorganizations...

Question 7

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),while 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?

Accepted Answer

When the land was transferred in a § 351 exchange, Joshua's basis of $600,000 carried over to the corporation as his basis in the land. Since the land was sold for $310,000, the corporation realized a loss of $290,000. The loss can be recognized by Purple Corporation because the land was not used for any business purpose during the time it was owned by the corporation. This loss is allocated equally to the two shareholders under the pro rata distribution. Thus, each shareholder can claim a loss of $145,000 ($290,000/2) on their individual tax returns.

Question 8

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

Accepted Answer

Reorganizations and like-kind exchanges are both subject to similar tax treatment under the Federal income tax code. Both allow for the deferral of taxable income and allow for the transfer of property without incurring immediate tax liability.

Question 9

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

Accepted Answer

While meeting the § 368 reorganization "Type" requirements is an important consideration in corporate restructurings, there are many other factors that must be taken into account when planning the structure of the transaction, including tax implications, legal considerations, shareholder approval, and more.

Question 10

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

Accepted Answer

The answer of Since debt security holders do not own...

Question 11

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?

Accepted Answer

- The land held for three years as an investment with a basis of $300,000 and a fair market value of $600,000 will result in a capital gain of $300,000.
- The inventory with a basis of $100,000 and a fair market value of $80,000 will result in an ordinary loss of $20,000.
- The marketable securities held for four years as an investment with a basis of $200,000 and a fair market value of $240,000 will result in a capital gain of $40,000.
Therefore, the total net capital gain is $340,000 and the ordinary loss is $20,000.

Question 12

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?

Accepted Answer

Since there is no change in ownership percentage of the property during the time Toucan Corporation held it, there is no gain or loss recognized on the contribution to capital or distribution of the property. Therefore, the answer is $0.

Question 13

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?

Accepted Answer

The answer of The stock in Rhea Corporation is owned...

Question 14

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.

Accepted Answer

The answer of The determination of whether a shareholder's gain...

Question 15

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.

Accepted Answer

In a transaction that meets the § 368 requirements (a type of reorganization under the Internal Revenue Code), target shareholders generally do not recognize gain or loss when they receive a combination of stock in the acquiring corporation and other property or cash (often referred to as "boot") unless the boot received is sufficient to trigger gain recognition. The primary focus is on the continuity of interest and the nature of the transaction rather than the receipt of boot per se.

Question 16

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.

Accepted Answer

When a corporate reorganization results in gains for shareholders, those gains may be treated as a dividend to the extent of the corporation's earnings and profits (E & P). This is because E & P represents the corporation's accumulated after-tax profits that have not yet been distributed to shareholders as dividends. If the gains from the reorganization exceed the corporation's E & P, they may be treated as a capital gain instead.

Question 17

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

Accepted Answer

When an acquiring corporation uses property other than stock as consideration in a corporate reorganization, it may recognize gains but not losses on the transaction. This is due to a provision in the tax code known as the "nonrecognition rule," which allows for the deferral of tax liability on gains from such transactions. This rule does not apply to losses, however, which are generally recognized immediately.

Question 18

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.

Accepted Answer

Individual shareholders can reduce the amount taxable by their basis in the stock involved if a gain on a corporate reorganization is treated as a capital gain instead of a dividend. Therefore, individual shareholders prefer to have it treated as a capital gain.

Question 19

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

Accepted Answer

This is true under the rules of the tax code in the United States. When a corporation acquires another corporation's assets, the basis for the acquiring corporation in those assets is increased by any gain recognized by the target corporation. This can help to reduce the acquiring corporation's tax liability in the future if it sells or disposes of those assets.

Question 20

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

Accepted Answer

The amount of gain recognized by a shareholder in a corporate reorganization is based on the difference between the fair market value of the property received and the shareholder's adjusted basis in the stock exchanged. Earnings and Profits (E & P) affect dividend distributions, not the recognition of gain in reorganizations.

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