Question 1

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

Accepted Answer

Both corporate reorganizations and like-kind exchanges involve the transfer of assets without incurring immediate tax liabilities. In both cases, the assets being transferred must meet specific criteria and be used for business purposes. However, there are some key differences between the two, such as the types of transactions covered and the specific tax rules that apply.

Question 2

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?

Accepted Answer

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

Question 3

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...

Question 4

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?

Accepted Answer

According to the tax code, when a shareholder transfers property to a corporation in a § 351 exchange, the corporation takes over the adjusted basis of the property in the hands of the shareholder. In this case, Purple takes over Joshua's basis of $400,000 in the land and $20,000 in securities, and Ellie's basis of $220,000 in equipment. The total adjusted basis for the assets is $640,000.

When the undeveloped land is sold for $290,000, Purple realizes a loss of $110,000 ($400,000 - $290,000). However, the tax code prohibits loss recognition in a § 351 transaction between a corporation and shareholders. Therefore, Purple cannot recognize any loss on the sale of the land.

The other properties were sold at a gain, but the question only asks about the loss on the sale of the land.

Question 5

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 corporate shareholders to deduct a portion of the dividends they receive from other corporations from their taxable income. Therefore, corporate shareholders would prefer to have a gain on a reorganization treated as a dividend rather than as a capital gain, as it would qualify for the dividends received deduction and result in a lower tax liability.

Question 6

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 planning the structure of a corporate restructuring, there are many other aspects to consider such as tax implications, legal requirements, shareholder approvals, and more. Therefore, it is not the only thing that needs to be considered.

Question 7

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 Supreme Court decision regarding corporate reorganizations and taxation occurred in 1935 with the Gregory v. Helvering case, not in 1916.

Question 8

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?

Accepted Answer

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

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

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 11

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 Internal Revenue Code, when an acquiring corporation uses property other than stock (such as cash or assets) as consideration in a corporate reorganization, they may recognize gains but not losses on the transaction. This is known as the "no loss" rule.

Question 12

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

Noncorporate shareholders cannot elect out of § 368 to recognize losses in a corporate reorganization, as § 368 provides for non-recognition of gain or loss in such transactions.

Question 13

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

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 14

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

Question 15

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 16

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 determination is based on whether the redemption is "substantially disproportionate" or not, which involves specific IRS criteria, not just a simple comparison of percentages held in the target and acquiring corporations.

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?

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 18

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

Accepted Answer

Corporate reorganizations and like-kind exchanges are governed by different sections of the tax code, and reorganizations do not qualify as like-kind exchanges.

Question 19

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?

Accepted Answer

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

Question 20

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

Accepted Answer

In order for a corporate restructuring to qualify as a tax-free reorganization, it must meet certain requirements laid out in the tax code, including having a sound business purpose. This requirement helps ensure that the transaction is not solely being carried out for tax avoidance purposes.

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