Question 1

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

Accepted Answer

Both corporate reorganizations and like-kind exchanges involve the exchange of one asset for another without the recognition of immediate gain or loss. Therefore, the treatment of corporate reorganizations is similar to like-kind exchanges.

Question 2

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

Accepted Answer

The answer of Corporate reorganizations can meet the requirements to...

Question 3

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

According to the Internal Revenue Code, gains recognized by shareholders in a corporate reorganization may be treated as a dividend to the extent of the corporation's accumulated earnings and profits (E&P). This is known as the E&P limitation.

Question 4

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

Accepted Answer

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

Question 6

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.

Accepted Answer

When a corporation completely liquidates, it must recognize gain or loss on the distribution of its assets to the shareholders. In this case, Lilac Corporation will recognize a capital gain of $300,000 ($600,000 fair market value of land - $300,000 basis) and a capital gain of $40,000 ($240,000 fair market value of securities - $200,000 basis). However, it will also recognize an ordinary loss of $20,000 because the inventory's fair market value is less than its basis. Therefore, the net capital gain will be $340,000 and the ordinary loss will be $20,000, making choice C the correct answer.

Question 7

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

Accepted Answer

According to the tax code, if an acquiring corporation uses property other than stock as consideration in a corporate reorganization, they may recognize gains but not losses on the transaction. This is known as a non-recognition transaction.

Question 8

In 1916, 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 In 1916, the Supreme Court decided that...

Question 9

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.

Question 10

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.

Accepted Answer

The answer of On April 7, 2011, Crow Corporation acquired...

Question 11

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.

Accepted Answer

When property is transferred to a corporation in a § 351 exchange, the transferor does not recognize any gain or loss on the transfer. Therefore, Joshua and Ellie do not recognize any gain or loss upon transferring their respective properties to Purple.

When Purple sells the undeveloped land for $290,000, it incurs a loss of $60,000 ($350,000 - $290,000). Since Purple never used the land for any business purpose, the loss is recognized in full and can be distributed pro rata to Joshua and Ellie.

Therefore, each shareholder can recognize a loss of $30,000 ($60,000 ÷ 2) on their individual tax returns.

Question 12

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.

Accepted Answer

The answer of The stock in Tangerine Corporation is held...

Question 13

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.

Accepted Answer

The dividends received deduction allows corporations to deduct a portion of the dividends they receive from other corporations, effectively reducing the amount of tax they pay on those dividends. Therefore, if a gain on a reorganization is treated as a dividend, the corporate shareholders can take advantage of this deduction and pay less tax compared to if the gain was treated as a capital gain.

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

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

Accepted Answer

This is true. In order for a corporate restructuring to qualify as a tax-free reorganization, it must have a sound business purpose, such as improving efficiency or reducing costs. The IRS scrutinizes such transactions to ensure that they are not simply tax avoidance schemes.

Question 16

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

Accepted Answer

The answer of Noncorporate shareholders may elect out of §...

Question 17

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.

Accepted Answer

Since the property was contributed to Toucan Corporation as a capital contribution, the basis of the property to the Corporation is the same as the basis of the shareholders prior to the contribution, which is $200,000. When the property is distributed in liquidation, Toucan will recognize a loss to the extent that the fair market value of the property is less than its basis. In this case, the fair market value of the property is $40,000, which is less than Toucan's basis of $200,000, but because it is a non-cash distribution, the loss is not recognized. Therefore, the answer is A.

Question 18

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.

Accepted Answer

The answer of During the current year, Ecru Corporation is...

Question 19

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 requirements of § 368 is important, other factors such as tax consequences, financial accounting implications, and business objectives must also be taken into consideration when planning a corporate restructuring.

Question 20

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.

Accepted Answer

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

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