Deck 5: Complete Liquidations

Question 1

Gains and losses on liquidation distributions received all in one year may be deferred over two or more years using the cost recovery method.

Answer 1

False

Question 2

Generally, by considering a sale of stock, a corporation avoids having the value of a business diminished directly or indirectly by the corporate level tax.

Answer 2

False

Question 3

Section 338 eliminated the Kimbell-Diamond doctrine.

Answer 3

True

Question 4

A shareholder reports a total gain or loss on a liquidation even if the stock was acquired at different times.

Question 5

The purchaser of a corporation with an NOL carryover should consider making a § 338 election.

Question 6

A shareholder can defer the recognition of gain on liquidation when an installment note is received, if the note arose from the sale of all the corporation's assets within the 12-month period starting with the adoption of the plan of liquidation.

Question 7

After the repeal of all rules based on the General Utilities doctrine, revised § 336 now provides that, as a general rule, a corporation does not recognize any gains or losses when distributing its assets to its shareholders in complete liquidation.

Question 8

It is necessary for a corporation to dissolve before a liquidation can be completed.

Question 9

Shareholders can accelerate the recognition of loss on a complete liquidation by receiving payments in two or more years.

Question 10

Shareholders generally treat the amounts received in a liquidation as amounts received in full payment of their stock.

Question 11

Even though the parent corporation in a § 332 liquidation uses the carryover basis of the subsidiary as its basis in the assets received, the depreciation recapture rules apply to the subsidiary.

Question 12

The treatment of distributions in liquidations differs from that in nonliquidating distributions in that the corporation is always allowed to recognize loss on a liquidating distribution.

Question 13

Assuming a proper election has been made under § 338, a subsidiary corporation determines its basis in assets as equal to the price that the parent corporation paid for the subsidiary's stock, adjusted by liabilities of the subsidiary and its ownership percentage.

Question 14

When a shareholder receives an installment note attributable to a sale of property by a liquidating corporation, receipt of the note is always treated as full payment for the stock for Federal income tax purposes.

Question 15

When a subsidiary is liquidated by its parent corporation, the basis of the assets transferred from the subsidiary to the parent is determined by the amount of the parent's investment in the subsidiary's stock.

Question 16

In the liquidation of a subsidiary under § 332, gains and losses will be recognized on the distribution of property to minority shareholders.

Question 17

A parent corporation generally recognizes no gain or loss on property it receives upon the liquidation of a subsidiary corporation.

Question 18

Section 338 permits a parent corporation to elect to treat the purchase of stock of a subsidiary as a purchase of assets "to obtain the same basis that it would have obtained had it purchased the assets directly" (fair market value).The subsidiary must liquidate when the parent elects § 338.

Question 19

In most situations, a target subsidiary has some assets that have appreciated in value (i.e., fair market value exceeds the asset's basis), and other assets where the value is less than the asset's basis.In such case, the acquiring corporation, desiring the highest basis possible for the assets, might first purchase the appreciated property, then purchase the subsidiary's stock, and then liquidate the subsidiary under § 332.By so doing, the acquiring corporation might violate the Code's "consistency" provision.

Question 20

As a general rule, shareholders calculate gains and losses on liquidations based on the full fair market value of any installment notes received.

Question 21

Q Corporation is a wholly owned subsidiary of P Corporation.P has an account receivable from Q in the amount of $50,000.As a part of a complete liquidation, Q transfers property (fair market value of $50,000 and basis of $30,000) to P in settlement of the debt.What is the amount of gain that Q should recognize?

A)$20,000
B)$30,000
C)$0
D)$50,000

Question 22

X Corporation purchased 90 percent of Y Corporation on February 3 of the current year for $1.2 million and made a § 338 election.The fair market value of Y Corporation's assets is $1.3 million, and its basis is $900,000.Select the correct statement.

A)Y Corporation recognizes neither gain nor loss and increases the basis of its assets to $1.2 million.
B)Y Corporation recognizes $300,000 gain and increases the basis of its assets to $1,333,333.
C)Y Corporation recognizes $400,000 gain and increases the basis of its assets to $1,333,333.
D)None of the above

Question 23

K purchased all 100 shares of N Corporation in 2008 for $50,000.N Corporation adopts a plan of liquidation on January 1, 2012.On May 1, 2012, N sells its only asset, land, for $10,000 cash and an installment note with a face amount and fair market value of $90,000.On January 8, 21013, N distributes the cash and note to K.On her 2012 tax return, K will report the following as gain or loss from the liquidation.(Assume no collections on the installment note during 2012)

A)$0
B)$5,000
C)$50,000
D)$100,000

Question 24

On January 15, 2012, the Board of Directors of K Corporation voted to adopt a plan of liquidation as of February 1, 2012.On January 25, 2012, they sell land and realize a $400,000 loss.On February 15, 2012, they sell a building acquired in 2003 and depreciated under ACRS at a $200,000 gain (total depreciation recapture potential of $380,000).K distributes all of its assets to its shareholders on December 31, 2012.On K's final tax return, it will report

A)$400,000 loss on sale of land only
B)No gain or loss on sale of land and building
C)$400,000 loss on sale of land and $200,000 ordinary income on sale of building
D)$200,000 ordinary income on sale of building only

Question 25

K purchased all 100 shares of N Corporation in 2005 for $50,000.N Corporation adopts a plan of liquidation on January 1, 2012.On May 1, 2012, N sells its only asset, land, for $10,000 cash and an installment note with a face amount and fair market value of $90,000.On December 1, 2012, N distributes the cash and note to K.In 2013, K receives $9,000 from the installment note.How much gain must K report in 2013?

A)$0
B)$4,500
C)$9,000
D)None of the above

Question 26

R, an individual, purchased all the stock of T Corporation on January 1, 2003 for $20,000.On January 1, 2012, T adopts a plan of liquidation.On January 20, 2012, T sells land with a basis of $60,000 for $45,000.On January 31, 2012, T distributes the $45,000 cash plus its only other asset, FIFO inventory with a basis of $40,000 and a fair market value of $48,000, to R.Which of the following statements is true?

A)T recognizes a loss of $15,000; R recognizes a gain of $73,000 and takes inventory with a basis of $48,000.
B)Neither T nor R recognize gain.
C)T recognizes neither gain nor loss; R recognizes a $73,000 gain and has a basis for the inventory of $48,000.
D)T recognizes a $15,000 loss on the sale and an $8,000 gain on the distribution; R recognizes a gain of $73,000 and has inventory with a basis of $48,000.
E)T recognizes a $15,000 loss on the sale and an $8,000 gain on the distribution; R recognizes neither gain nor loss and has inventory with a basis of $40,000.

Question 27

X is the sole shareholder of Z Shipping Corporation.In anticipation of the corporation's liquidation, X in 2008 contributed an ancient wharf to the corporation with a built-in loss of $ 1 million (value $2 million, basis $3 million).In 2012, Z distributed the wharf along with land purchased and held for business purposes by the corporation worth $900,000 (basis $200,000).What is the amount of gain/ loss recognized by Z?

A)$1 million loss, $700,000 gain
B)$700,000 gain
C)$0
D)$1 million loss

Question 28

R Corporation, a men's clothing retailer, purchased all of the stock of L Corporation, a women's clothing retailer, for $200,000 as part of a plan to diversify.But L Corporation became insolvent, with liabilities of $500,000 and assets of $350,000.R decided to liquidate L.R's tax loss related to the liquidation is

A)$350,000
B)$200,000
C)$150,000
D)$0

Question 29

Z Corporation, in complete liquidation, distributes its only asset, land, to its sole shareholder.The land has a basis of $40,000 and a fair market value of $55,000.The shareholder assumed Z's liability of $60,000.Z Corporation will report gain on the distribution of

A)$0
B)$15,000
C)$20,000
D)$60,000

Question 30

Q Corporation had assets with a basis of $800,000 and no liabilities.P Corporation bought all the stock of Q Corporation for $1 million.Three years later, when Q Corporation's assets had shrunk to a basis of $600,000, P Corporation liquidated Q Corporation in a tax-free liquidation under § 332.What is P Corporation's basis in the assets received from Q Corporation? (Assume that P Corporation's basis in its assets not received from Q Corporation at the time of liquidation of Q was $750,000.)

A)$400,000
B)$800,000
C)$1 million
D)$600,000

Question 31

D Corporation purchased all of the stock of E Corporation for $1 million.E's only asset is land with a basis of $200,000.E had no liabilities.D elects § 338.D also liquidates E.E is deemed to have sold its land for fair market value, and E must recognize a gain of $800,000.The tax liability resulting from the deemed sale is $272,000 ($800,000 x 34%).What is D's basis in the land?

A)$728,000
B)$1,272,000
C)$1 million
D)$200,000

Question 32

L Corporation's only assets are land and building.Their combined original cost is $1 million, basis is $600,000, and current fair market value is $1.2 million.L elected the straight-line method of depreciation.L distributes the land and building to its sole shareholder in complete liquidation.The amount of income that L must report is

A)$0
B)$80,000
C)$400,000
D)$600,000

Question 33

K purchased all 100 shares of N Corporation in 2004 for $50,000.N Corporation adopts a plan of liquidation on January 1, 2012.On May 1, 2012, N sells its only asset, land, for $10,000 cash and an installment note with a face amount and fair market value of $90,000.On December 1, 2012, N distributes the cash and note to K.On her 2012 tax return, K will report which of the following as gain from the liquidation? (Assume no collections on the installment note during 2012.)

A)$0
B)$5,000
C)$50,000
D)$100,000

Question 34

J purchased 100 shares of C common stock in 2007 for $1,000.J purchased another 100 shares in 2012 for $10,000.In the current year, C adopts a plan of liquidation and distributes $8,000 to J as the first installment ($4,000 for each block).J's recognized gain or loss on the distribution is

A)$3,000 loss
B)$0 gain or loss
C)$3,000 gain
D)$8,000 gain

Question 35

K purchased all 100 shares of N Corporation in 2008 for $50,000.N Corporation adopts a plan of liquidation on January 1, 2012.On May 1, 2012, N sells its only asset, land, for $10,000 cash and an installment note with a face amount and fair market value of $90,000.On December 1, 2012, N distributes the cash and note to K.N's basis in the land is $36,000.On its final return, N will report a gain from the note of

A)$0
B)$5,400
C)$27,000
D)$54,000

Question 36

Y Corporation purchases S stock as follows: $\begin{array}{lr}\text { November } 15,2010 & 10 \text { percent } \\\text { February } 12,2011 & 5 \text { percent } \\\text { November } 12,2011 & 60 \text { percent } \\\text { December } 28,2011 & 10 \text { percent }\end{array}$ The last date that Y can purchase another 10 percent of S stock and still qualify for the § 338 election is

A)December 31, 2011
B)January 14, 2012
C)February 11, 2012
D)November 11,2012
E)not relevant; Y will never qualify to make the § 338 election.

Question 37

X Corporation is owned by Y Corporation and T, an individual.Y owns 90 percent of X's stock, and T owns the other 10 percent.X adopts a plan of liquidation and distributes land with a basis of $700,000 and a fair market value of $900,000 to Y, and marketable securities with a basis of $40,000 and a fair market value of $100,000 to T.X must report gain or loss of

A)$0
B)$60,000
C)$186,000
D)$260,000

Question 38

A Corporation owns 90 percent of the outstanding stock of B Corporation; the remaining 10 percent is owned by unrelated parties.In a liquidation pursuant to § 332, B distributed and transferred property to A with a fair market value of $80,000 (basis $30,000).In addition, B distributed and transferred property to the minority shareholders worth $11,000 (basis $9,000).How much gain does B realize?

A)$50,000
B)$52,000
C)$2,000
D)$0

Question 39

What are the provisions of § 338 for avoiding the abuses under Kimbell-Diamond?

A)Stock purchases must be treated as a purchase of assets.
B)A subsidiary must be acknowledged to have been acquired with the intent to obtain its assets.
C)It is required that the subsidiary actually be liquidated.
D)All of the above
E)None of the above

Question 40

Z Corporation purchases 90 percent of B Corporation's outstanding common stock for $1 million on January 1, 2003.On June 15, 2012, B adopts a plan of liquidation and distributes assets with a fair market value of $1.2 million and a basis of $900,000 to Z.B distributes assets with a fair market value of $133,333 and a basis of $90,000 to the minority shareholders.Which of the following is true?

A)Z Corporation recognizes neither gain nor loss and has a basis in the assets received of $900,000.
B)Z Corporation recognizes neither gain nor loss and has a basis in the assets received of $1 million.
C)Z Corporation recognizes $20,000 gain and has a basis in the assets received of $1 million.
D)Z Corporation recognizes a gain of $34,333 and has a basis in the assets received of $1 million.

Question 41

The term grossed-up basis

A)Refers to adjustment of the deemed price of a subsidiary corporation for a minority interest when a parent corporation owns less than 100 percent of the subsidiary and elects § 338.
B)Is obtained by the following formula:
$$\begin{array} { c } \text { Grossed-up } \\\text { basis }\end{array} = \begin{array} { c } \text { Parent corporation's } \\\text { basis in subsidiary's } \\\text { stock on the acquisition date }\end{array} \times \frac { \begin{array} { c } \% \text { of subsidiary's } \\\text { stock held by parent } \\\text { on the acquisition date }\end{array} } { 100 \% }$$
C)Requires that the parent corporation purchase at least 90 percent of the subsidiary's stock (except nonvoting, nonparticipating, preferred stock).
D)Is described by all of the above.

Question 42

When a new corporation is created from the old subsidiary under provisions of § 338, the new corporation may

A)Adopt any tax year that suits its purposes, limited only by the consolidated return rules
B)Disregard anti-churning rules and use ACRS depreciation for all of the purchased property
C)Not have available any net operating loss carryovers of the old subsidiary
D)Do all of the above

Question 43

K Corporation is 100 percent owned by Seller, who has a basis in her stock of $10,000.K Corporation's sole asset is a waterbed factory worth $100,000 (basis $30,000).If Buyer purchases all the stock of K Corporation for $100,000, Buyer will own a corporation that holds a waterbed factory with a basis in the factory of $30,000, much less than the cost to Buyer.If Buyer is a corporation, a § 338 election could be made to obtain a step-up in basis to $100,000 for the factory.The result would be

A)A deemed sale of the factory and a tax on a gain of $70,000 ($100,000 - $30,000 basis)
B)A tax on the gain of $90,000 ($100,000 - $10,000 basis)
C)No tax, as basis would be carried over from the subsidiary corporation
D)None of the above

Question 44

When the general liquidation provisions of § 331 apply, consideration should be given to the possibility of minimizing tax obligations.Available planning options include

A)Placing gifts in trusts
B)Arranging a series of liquidating distributions that spans several years
C)Selling stock for transfer to a trust with a reversionary interest
D)All of the above

Question 45

K Corporation is 100 percent owned by Seller, who has a basis in her stock of $10,000.K Corporation's sole asset is a waterbed factory worth $100,000 (basis $30,000).If Buyer purchases all the stock of K Corporation for $100,000, Buyer will hold the waterbed factory with a basis in the factory of $30,000, much less than the cost to Buyer.If Buyer is not a corporation, Buyer would

A)Recognize a gain of $70,000 on the distribution of the property in liquidation
B)Have no gain on the liquidation because the basis in the stock, $100,000, is equivalent to the value of the assets received
C)Pay a single tax on the gain of $90,000 ($100,000 - $10,000 basis)
D)Do none of the above

Question 46

T Corporation purchased all of the stock of V Corporation last year for $1.2 million.V has a basis in its assets of $1.7 million.T Corporation does not elect § 338.A year later, W Corporation indicates that it would like to purchase the business of V for $1.4 million.Good tax planning dictates that T Corporation should

A)Liquidate V Corporation under § 332 and then sell the assets
B)Sell the V Corporation stock
C)Sell the assets without liquidating V Corporation
D)Do none of the above

Question 47

H Corporation purchased 55 percent of J Corporation's stock on April 5, 2011 and the remaining 45 percent on July 28, 2011 The time known as the consistency period under provisions of § 338 runs from April 5, 2010 through July 28, 2012.If H acquires any assets of J during this period, except in the ordinary course of business,

A)Their value is determined by carryover of the subsidiary's basis to the parent corporation.
B)Under the consistency rule, provisions of § 332 must govern the determination of their value.
C)It is deemed to have made a § 338 election to treat the stock purchase as an acquisition of assets, thus precluding a carryover basis.
D)None of the above are true.

Question 48

F Corporation purchases from an unrelated person 100 percent of the stock of G Corporation on April 20 of the current year.Assume the purchase price, adjusted for all relevant items, is $200,000.G's assets at acquisition date are $\begin{array} { l }\text { Class }&\text { Basis }&\text { Fair Market Value }\\\text { I Cash }&\$20,000&\$20,000\\III \text { Accounts receivable }&40,000&40,000\\\text { IV Inventory }&50,000&110,000\\\text { Total }&\$110,000&\$170,000\end{array}$
Under provisions of § 338, the purchase price is first allocated to cash in the amount of $20,000.This leaves $180,000 to be allocated.As there are no Class II assets, the allocation is to Class III and IV.How should the remainder be allocated?

A)Allocate $180,000 to the receivables and inventory; income from the sale of the inventory would be reduced.This will allow a loss to be taken when the receivables are collected.
B)Allocate $150,000 to the receivables and inventory.Because the remaining purchase price exceeds the fair market value of the Class III and IV assets, the basis of the assets in this class is limited to their fair market value.
C)Allocate $90,000 to the receivables and inventory.The basis of the parent corporation is that of the subsidiary corporation, according to the carryover principle under § 338.
D)None of the above

Question 49

Assets are grouped into five classes under provisions of § 338.The method of establishing the value of Class V, or intangible, assets in the nature of goodwill or going concern value is

A)To determine the fair market value by appraisal on election date
B)To assign 20 percent of fair market value to intangible assets according to the 20 percent allocation rule
C)To assign what remains, after fair market value allocations to the four other classes, to the goodwill or going concern value
D)All of the above
E)None of the above

Question 50

In assessing whether to use a § 338 election, considerations include

A)Tax benefits resulting from the step-up in basis enabled by a § 338 election (e.g., increased depreciation) are deferred.
B)When part of the basis is assigned to goodwill, no tax benefit is obtained until the acquired business is sold.
C)Future tax savings being discounted to determine their present value
D)All of the above

Question 51

From the following list identify the one item that does not describe one of the difficulties commonly presented by asset sales as compared to stock sales.

A)Transfer of titles
B)Notification of creditors in conformance with the applicable bulk sales laws
C)Nonassignable rights such as a license, lease, trademark, or other favorable contractual arrangement
D)Unwillingness of minority shareholders to sell even though the buyer does not want to share the business with outsiders