Question 1

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 Supreme Court initially ruled that corporate reorganizations were taxable events, but later decisions and legislative changes led to the recognition of certain reorganizations as non-taxable under specific conditions.

Question 2

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

Accepted Answer

According to IRS regulations, if an acquiring corporation is using property other than stock as consideration in a corporate reorganization, it may recognize gains but not losses on the transaction. This is known as a nonrecognition transaction.

Question 3

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 4

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 5

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

Accepted Answer

When an acquiring corporation purchases assets from a target, the basis for the acquiring corporation in the target's assets is increased by any gain recognized by the target. This means that if the target has a gain on the sale of assets, the acquiring corporation will have a higher basis in those assets for tax purposes.

Question 6

In the current year,Dove Corporation (E & P of $1 million) distributes all of its property in a complete liquidation.Alexandra,a shareholder,receives land having a fair market value of $200,000.Dove Corporation had purchased the land as an investment three years ago for $125,000,and the land was distributed subject to a $100,000 liability.Alexandra took the land subject to the $100,000 liability.What is Alexandra's basis in the land?

Accepted Answer

The answer of In the current year,Dove Corporation (E &...

Question 7

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 important in corporate restructurings, there are other factors that must be considered in the planning stage such as tax implications, financial reporting requirements, and shareholder approvals.

Question 8

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 9

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

This is true. When a shareholder receives a dividend, they are required to pay taxes on the full amount of the dividend. However, when a shareholder receives a capital gain from a corporate reorganization, they are only taxed on the gain, which is calculated as the selling price of the stock minus the shareholder's basis in the stock. Therefore, if the gain is treated as a capital gain rather than a dividend, the taxable amount can be reduced by the shareholder's basis in the stock.

Question 10

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 $250,000,a fair market value of $650,000,and is subject to a liability of $500,000.Kena,who takes the land subject to the liability,has a basis of $120,000 in the Ecru stock.With respect to the distribution of the land,which of the following statements is correct?

Accepted Answer

When Ecru Corporation distributes its only asset, the land, to its sole shareholder Kena, she takes the land subject to the liability of $500,000. This means that the amount of liability reduces Kena's basis in the property received. Kena's basis in the property is $250,000 (the basis of the land) minus $500,000 (the amount of the liability), which equals -$250,000. However, the basis in property cannot be negative, so it is treated as zero. Kena recognized a gain of $650,000 (fair market value of the land) minus $0 (her basis in the property) equals $650,000. However, Kena's basis in the Ecru stock is not relevant to the gain or loss recognized on the liquidation of the corporation. Therefore, option C is correct.

Question 11

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 corporation undergoes a reorganization, shareholders may recognize gains depending on the circumstances of the reorganization. These gains may be treated as dividends to the extent of the corporation's earnings and profits (E&P). This means that if the corporation has positive E&P, some or all of the gains recognized by shareholders may be treated as taxable dividends.

Question 12

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 13

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 14

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

Toucan Corporation will not recognize any loss on the distribution of the property because the fair market value at the time of distribution is greater than the basis of the property contributed four years ago. The basis of the property is irrelevant at the time of distribution, and thus, there is no loss recognized.

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 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 17

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

Accepted Answer

Reorganizations, such as mergers or acquisitions, receive similar tax treatment as like-kind exchanges. This means that the tax on gains or losses from the reorganization can be deferred until a later date, just as with like-kind exchanges.

Question 18

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 19

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 20

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...

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