Question 1

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.

Accepted Answer

The answer of A subsidiary corporation is liquidated at a...

Question 2

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

Accepted Answer

The answer of Section 332 can apply to a parent-subsidiary...

Question 3

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.

Accepted Answer

The answer of The related-party loss limitation applies to distributions...

Question 4

Abel owns all the stock of both Beige Corporation and Brown Corporation. Both corporations have significant amounts of E & P. Abel sells some of his stock in Beige to Brown Corporation. Abel will not have dividend income as a result of the sale of Beige stock.

Accepted Answer

When a shareholder sells stock to a related corporation, such as one they control, the transaction can be recharacterized as a dividend distribution if the selling corporation has significant earnings and profits (E & P).

Question 5

In a redemption of § 306 stock, the redemption proceeds constitute dividend income to the extent of the corporation's E & P on the date of the redemption.

Accepted Answer

In a redemption of § 306 stock, the redemption proceeds are treated as dividend income to the extent of the corporation's earnings and profits (E&P) on the date of the redemption. This is because § 306 stock is stock that has been acquired by a corporation in a tax-free reorganization and is being redeemed by the corporation. The purpose of treating the redemption proceeds as dividend income is to prevent taxpayers from using tax-free reorganizations to convert corporate earnings into capital gains.

Question 6

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.

Accepted Answer

Lucinda's basis in the land will be $90,000, which is Coral Corporation's basis in the land. The liability does not affect the basis of the property received in the distribution.

Question 7

Tammy forms White Corporation in a transaction qualifying under § 351. In that transaction, Tammy transferred cash and equipment in exchange for White Corporation common (1,000 shares) and preferred (200 shares) stock. The preferred stock is not § 306 stock for Tammy.

Accepted Answer

The statement accurately describes the transaction and the status of the preferred stock under § 306.

Question 8

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

Accepted Answer

The answer of Legal dissolution under state law is required...

Question 9

Tan Corporation paid interest expense on a debt incurred in financing a redemption of its stock. The interest expense is not deductible since it was incurred in connection with a stock redemption.

Accepted Answer

Interest expense incurred in connection with a stock redemption is generally considered deductible as a business expense. However, there may be limitations on the deductibility depending on the specific circumstances of the redemption and the debt incurred. It is advisable to consult with a tax professional for guidance on deductibility.

Question 10

For purposes of the application of § 304 (redemptions through the use of related corporations), a shareholder must own (directly or indirectly) at least 50% of the stock of two more corporations.

Accepted Answer

Under § 304 of the Internal Revenue Code, a shareholder must own at least 50% of the stock of two or more corporations for the section to apply to redemptions through the use of related corporations.

Question 11

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.

Accepted Answer

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

Question 12

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

Accepted Answer

Liquidation expenses are considered ordinary and necessary business expenses and are therefore deductible under § 162 of the Internal Revenue Code.

Question 13

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

Accepted Answer

When a corporation distributes installment notes to its shareholders in a liquidation, it will generally recognize gain or loss based on the fair market value of the installment notes. This is because the corporation is deemed to have sold the notes to the shareholders for their fair market value.

Question 14

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.

Accepted Answer

This statement is true. In both liquidating and nonliquidating distributions, the shareholder's basis in property received is its fair market value on the date of distribution.

Question 15

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.

Accepted Answer

The answer of If a liquidation qualifies under § 332,...

Question 16

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

Accepted Answer

The answer of As a general rule, a liquidating corporation...

Question 17

Three years ago, Darlene received preferred (§ 306) stock pursuant to a nontaxable stock dividend from Grackle Corporation. In the current year, Darlene gives the Grackle preferred stock to her sister, Nancy. The Grackle preferred stock is § 306 stock with regards to Nancy.

Accepted Answer

When preferred stock is received as a nontaxable stock dividend, it retains its status as § 306 stock in the hands of the recipient. Therefore, if Darlene received preferred stock that was § 306 stock, it will continue to be § 306 stock when she transfers it to her sister Nancy.

Question 18

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.

Accepted Answer

Brown Corporation's basis in the assets acquired from Green Corporation will be the assets' fair market value of $1.1 million, not the $850,000 basis Brown had in its Green stock. When a parent company liquidates a subsidiary and acquires its assets, the basis of those assets in the hands of the parent is generally their fair market value at the time of the acquisition.

Question 19

The built­in 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.

Accepted Answer

The built-in loss limitation in a complete liquidation applies only to losses attributable to the transfer of appreciated property to the corporation, not to losses attributable to a decline in fair market value after its transfer to the corporation.

Question 20

At a time when Blackbird Corporation had E & P of $700,000 and 1,000 shares of stock outstanding, the corporation distributed $300,000 to redeem 400 shares of its stock. The transaction qualified as a disproportionate redemption for the shareholder. Blackbird's E & P is reduced by $300,000 as a result of the distribution.

Accepted Answer

In a disproportionate redemption, the distribution is treated as a sale or exchange, not as a dividend, so the E & P is not reduced by the distribution amount. Instead, the E & P would be adjusted based on the gain or loss recognized by the shareholder on the sale or exchange, not the distribution amount itself.

Quiz 6: Corporations: Redemptions and Liquidations

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

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.

Abel owns all the stock of both Beige Corporation and Brown Corporation. Both corporations have significant amounts of E & P. Abel sells some of his stock in Beige to Brown Corporation. Abel will not have dividend income as a result of the sale of Beige stock.

In a redemption of § 306 stock, the redemption proceeds constitute dividend income to the extent of the corporation's E & P on the date of the redemption.

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.

Tammy forms White Corporation in a transaction qualifying under § 351. In that transaction, Tammy transferred cash and equipment in exchange for White Corporation common (1,000 shares) and preferred (200 shares) stock. The preferred stock is not § 306 stock for Tammy.

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

Tan Corporation paid interest expense on a debt incurred in financing a redemption of its stock. The interest expense is not deductible since it was incurred in connection with a stock redemption.

For purposes of the application of § 304 (redemptions through the use of related corporations), a shareholder must own (directly or indirectly) at least 50% of the stock of two more corporations.

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.

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

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

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.

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.

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

Three years ago, Darlene received preferred (§ 306) stock pursuant to a nontaxable stock dividend from Grackle Corporation. In the current year, Darlene gives the Grackle preferred stock to her sister, Nancy. The Grackle preferred stock is § 306 stock with regards to Nancy.

The builtin 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.

Quiz 6: Corporations: Redemptions and Liquidations

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

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.

Abel owns all the stock of both Beige Corporation and Brown Corporation. Both corporations have significant amounts of E & P. Abel sells some of his stock in Beige to Brown Corporation. Abel will not have dividend income as a result of the sale of Beige stock.

In a redemption of § 306 stock, the redemption proceeds constitute dividend income to the extent of the corporation's E & P on the date of the redemption.

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.

Tammy forms White Corporation in a transaction qualifying under § 351. In that transaction, Tammy transferred cash and equipment in exchange for White Corporation common (1,000 shares) and preferred (200 shares) stock. The preferred stock is not § 306 stock for Tammy.

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

Tan Corporation paid interest expense on a debt incurred in financing a redemption of its stock. The interest expense is not deductible since it was incurred in connection with a stock redemption.

For purposes of the application of § 304 (redemptions through the use of related corporations), a shareholder must own (directly or indirectly) at least 50% of the stock of two more corporations.

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.

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

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

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.

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.

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

Three years ago, Darlene received preferred (§ 306) stock pursuant to a nontaxable stock dividend from Grackle Corporation. In the current year, Darlene gives the Grackle preferred stock to her sister, Nancy. The Grackle preferred stock is § 306 stock with regards to Nancy.

The built­in 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.

The builtin 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.