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

Question 1

When a shareholder receives property subject to a liability pursuant to a complete liquidation (not a parent-subsidiary liquidation),the fair market value of the property is reduced by the amount of the liability in computing the shareholder's gain (or loss)on the liquidation.

Answer 1

True

Question 2

The Federal income tax treatment of a corporate restructuring is an extension of allowing entities to form without taxation.

Answer 2

True

Question 3

If a liquidation qualifies under § 332,any minority shareholder will recognize gain (but not loss)equal to the difference between the fair market value of assets received and the basis of the shareholder's stock.

Answer 3

False

Question 4

One difference between the tax treatment accorded nonliquidating and liquidating distributions is with respect to the recognition of losses by the distributing corporation.As a general rule,a corporation recognizes losses on liquidating distributions of depreciated property (fair market value less than basis)but not on nonliquidating distributions of such property.

Question 5

For purposes of the § 338 election,a corporation must acquire,in a taxable transaction,at least 80% of the stock (voting power and value)of another corporation within an 12-month period.

Question 6

A parent corporation must make the § 338 election by the fifteenth day of the third month following the close of the tax year in which a qualified stock purchase occurs.

Question 7

As a general rule,a liquidating corporation recognizes gains and losses on the distribution of property in complete liquidation.

Question 8

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

Question 9

The related-party loss limitation does not apply to a distribution of property in complete liquidation that was appreciated (fair market value greater than basis)when it was transferred to the corporation.

Question 10

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 $700,000,the same as Green's basis in the assets.

Question 11

To ensure the desired tax treatment,parties contemplating a corporate reorganization should apply for a Regulation from the Treasury.

Question 12

Shareholders may defer gain,to the point of collection,on a liquidating distribution of installment notes obtained by the corporation in the sale of its assets.

Question 13

Sparrow Corporation purchased 90% of the stock of Warbler Corporation eight years ago for $1 million.In the current year,Sparrow liquidates Warbler and acquires assets with a basis to Warbler of $850,000 (fair market value of $1.2 million).Sparrow will have a basis in the assets of $850,000 (Warbler's basis in the assets),and a recognized loss of $150,000 ($1 million basis in Warbler stock - $850,000 carryover basis in assets).

Question 14

A subsidiary is liquidated pursuant to § 332.The parent has held 100% of the stock in the subsidiary for the past ten years.The subsidiary has E & P of $600,000 at the time of liquidation.The subsidiary's E & P disappears as a result of the liquidation.

Question 15

The built-in 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.

Question 16

One advantage of acquiring a corporation via an asset purchase instead of a stock purchase is that an asset purchase avoids the transfer of the acquired corporation's liabilities.

Question 17

Legal dissolution under state law is not required for a liquidation to be complete for tax purposes.

Question 18

Section 332 does not apply to a parent-subsidiary liquidation if the subsidiary corporation is insolvent on the date of the liquidation.

Question 19

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.

Question 20

If a parent corporation makes a § 338 election,the subsidiary recognizes gains and losses as result of a deemed sale of its assets.

Question 21

On April 7,2010,Crow Corporation acquired land in a transaction that qualified under § 351.The land had a basis of $480,000 to the contributing shareholder and a fair market value of $350,000.Assume that the shareholder also transferred equipment (basis of $50,000,fair market value of $200,000)in the same § 351 exchange.Crow Corporation adopted a plan of liquidation on October 6,2011.On December 8,2011,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 $300,000 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) $50,000.
C) $180,000.
D) $230,000.
E) None of the above.

Question 22

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) $100,000.
E) None of the above.

Question 23

Debt security holders recognize gain when the interest rate on the securities received is greater than the interest rate on the bonds given up.

Question 24

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.

Question 25

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 $300,000,a fair market value of $650,000,and is subject to a liability of $400,000.Kena,who takes the land subject to the liability,has a basis of $75,000 in the Ecru stock.With respect to the distribution of the land,which of the following statements is correct?

A) Ecru Corporation recognizes a gain of $100,000.
B) Kena has a basis of $250,000 in the land.
C) Kena recognizes a gain of $175,000.
D) Kena has a basis of $300,000 in the land.
E) Kena recognizes a gain of $575,000.

Question 26

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

Question 27

In 1916,the Supreme Court decided that corporate reorganizations were substantially continuations of the prior entities and thus should not be subject to taxation.

Question 28

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.

Question 29

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

Question 30

If the target corporation in a reorganization has a deficit in earnings and profits,any gains recognized by the shareholders are treated as stock redemptions and not as dividends.

Question 31

The stock in Black Corporation is owned entirely by Nancy (80%)and Wanda (20%),mother and daughter.Three years ago,Nancy contributed land (basis of $200,000,fair market value of $250,000)to Black Corporation in a transaction that qualified under § 351.In the current year and pursuant to a complete liquidation of Black,the land is distributed proportionately to Nancy and Wanda.At the time of the liquidating distribution,the land had a fair market value of $100,000.What amount of loss will Black Corporation recognize on the distribution of the land?

A) $20,000.
B) $80,000.
C) $100,000.
D) $150,000.
E) None of the above.

Question 32

The gains shareholders recognize as a part of a corporate reorganization may be treated a dividend to the extent of the corporation's earnings and profits.

Question 33

Pursuant to a complete liquidation,Oriole Corporation distributes to its shareholders land with a basis of $450,000 and a fair market value of $550,000.The land is subject to a liability of $600,000.What is Oriole's recognized gain or loss on the distribution?

A) $0.
B) $100,000 gain.
C) $150,000 gain.
D) $50,000 loss.
E) None of the above.

Question 34

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

Question 35

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

Question 36

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

Question 37

Pursuant to a complete liquidation,Woodpecker Corporation distributes the following assets to its unrelated shareholders: land held for six years as an investment (basis of $100,000,fair market value of $300,000),inventory (basis of $100,000,fair market value of $140,000),and marketable securities held for two years as an investment (basis of $200,000,fair market value of $120,000).What are the tax results to Woodpecker Corporation as a result of the liquidation?

A) Woodpecker Corporation would recognize ordinary income of $40,000 and a net capital gain of $200,000.
B) Woodpecker Corporation would recognize ordinary income of $40,000 and a net capital gain of $120,000.
C) Woodpecker Corporation would recognize ordinary income of $40,000 and a net capital loss of $80,000.
D) Woodpecker Corporation would recognize no gain or loss on the liquidation.
E) None of the above.

Question 38

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.

Question 39

The gain recognized by a shareholder in a corporate reorganization is the difference between the realized gain and the boot received.

Question 40

For corporate reorganizations,the tax laws should be considered while planning the structure of the reorganization.

Question 41

The stock of Brown Corporation (E & P of $680,000)is owned as follows: 80% by Orange Corporation (basis of $620,000),and 20% by Susanna (basis of $155,000).Both shareholders purchased their shares in Brown five years ago.In the current year,Brown Corporation liquidates and distributes land (fair market value of $800,000,basis of $970,000)to Orange Corporation,and securities (fair market value of $200,000,basis of $160,000)to Susanna.Which of the following statements is incorrect with respect to the tax consequences resulting from these distributions?

A) Susanna recognizes a $45,000 gain and has a $200,000 basis in the securities.
B) Brown recognizes no loss on the distribution of the land.
C) Orange recognizes no gain and has a $970,000 basis in the land.
D) Brown recognizes no gain on the distribution of the securities.
E) None of the above.

Question 42

Mary and Jane,unrelated taxpayers,own Gray Corporation's stock equally.One year before the complete liquidation of Gray,Mary transfers land (basis of $420,000,fair market value of $350,000)to Gray Corporation as a contribution to capital.Assume that Mary also contributed other property in the same transaction having a basis of $20,000 and fair market value of $95,000.In liquidation,Gray distributes the land to Jane.At the time of the liquidation,the land is worth $290,000.

Question 43

Indigo has a basis of $1 million in the stock of Owl Corporation,a subsidiary in which it owns 100% of all classes of stock.Indigo purchased the stock in Owl 10 years ago.In the current year,Indigo liquidates Owl and acquires assets worth $1.2 million.At the time of its liquidation,Owl Corporation had a basis of $800,000 in the assets and E & P of $500,000.Which of the following statements is correct with respect to the liquidation?

A) Owl recognizes a gain of $400,000.
B) Indigo has a $1 million basis in the assets.
C) Owl's E & P of $500,000 is eliminated.
D) Indigo recognizes a gain of $200,000.
E) None of the above.

Question 44

Penguin Corporation purchased bonds (basis of $95,000)of its 100% owned subsidiary,Finch Corporation,at a discount.Pursuant to a § 332 liquidation and in satisfaction of the indebtedness,Finch distributes land worth $100,000 (basis of $110,000)to Penguin.Which of the following statements is correct with respect to the distribution of land?

A) Neither Finch nor Penguin recognize gain (or loss).
B) Finch recognizes a loss of $10,000 and Penguin recognizes no gain.
C) Finch recognizes no loss and Penguin recognizes a gain of $5,000.
D) Finch recognizes a loss of $10,000 and Penguin recognizes a gain of $5,000.
E) None of the above.

Question 45

All of the following statements are true about corporate reorganization except:

A) Taxable amounts for shareholders are classified as a dividend or capital gain.
B) Reorganizations receive treatment similar to corporate formations under § 351.
C) The transfers of stock to and from shareholders qualify for like-kind exchange treatment.
D) The value of the stock received by the shareholder less the gain not recognized (postponed) will equal the shareholder's basis in the stock received.
E) All of the above statements are true.

Question 46

Which of the following statements is true concerning all types of tax-free corporate reorganizations?

A) Assets are transferred from one corporation to another.
B) Stock is exchanged with shareholders.
C) Liabilities that are assumed when cash is also used as consideration will be treated as boot.
D) Corporations and shareholders involved in the reorganization may recognize gains but not losses.
E) None of the above statements is true.

Question 47

The stock of Tan Corporation (E & P of $1.3 million)is owned as follows: 90% by Egret Corporation (basis of $520,000),and 10% by Zoe (basis of $55,000).Both shareholders acquired their shares in Tan more than six years ago.In the current year,Tan Corporation liquidates and distributes land (fair market value of $1.1 million,basis of $750,000)and equipment (fair market value of $700,000,basis of $410,000)to Egret Corporation,and securities (fair market value of $200,000,basis of $150,000)to Zoe.What are the tax consequences of these distributions to Egret,to Tan,and to Zoe?

Question 48

After a plan of complete liquidation has been adopted,Condor Corporation sells its only asset,land (basis of $220,000),to Eduardo (an unrelated party)for $300,000.Under the terms of the sale,Condor Corporation receives cash of $50,000 and Eduardo's notes for the balance of $250,000.The notes are payable over the next five years ($50,000 per year)and carry an appropriate interest rate.Immediately after the sale,Condor Corporation distributes the cash and notes to Maria,the sole shareholder of Condor Corporation.Maria has a basis of $30,000 in the Condor stock.The installment notes have a value equal to their face amount.If Maria wishes to defer as much gain as possible on the transaction,which of the following is correct?

A) Maria recognizes a gain of $20,000 in the year of liquidation.
B) Maria recognizes a gain of $45,000 in the year of liquidation.
C) Maria recognizes a gain of $270,000 in the year of liquidation.
D) Condor Corporation recognizes no gain or loss on the distribution of the installment notes.
E) None of the above.

Question 49

Mars Corporation merges into Jupiter Corporation by exchanging all of its assets for 300,000 shares of Jupiter stock valued at $2 per share and $100,000 cash.Wanda,the sole shareholder of Mars,surrenders her Mars stock (basis $900,000)and receives all of the Jupiter stock transferred to Mars plus the $100,000.How does Wanda treat this transaction on her tax return?

A) Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $900,000.
B) Wanda recognizes a loss of $100,000. Her Jupiter stock basis is $800,000.
C) Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $700,000.
D) Wanda realizes a $200,000 loss of which $100,000 is recognized. Her Jupiter stock basis is $1 million.
E) None of the above.

Question 50

A shareholder bought 2,000 shares of Zee Corporation for $90,000 several years ago.When the stock is valued at $200,000,Zee redeems these shares in exchange for 6,000 shares of Yea Corporation stock.This transaction meets the requirements of § 368.Which of the following statements is true with regard to this transaction?

A) The shareholder has a recognized gain of $110,000.
B) The shareholder has a postponed gain of $110,000.
C) The shareholder has a basis in the Yea stock of $200,000.
D) Gain or loss cannot be determined because the value of the Yea stock is not given.
E) None of the above statements is true.

Question 51

Yoko purchased 10% of Toyger Corporation's stock six years ago for $70,000.In a transaction qualifying as a "Type C" reorganization,Yoko received $50,000 cash and 8% of Angora Corporation's stock (valued at $100,000)in exchange for her Toyger stock.Prior to the reorganization,Toyger had $200,000 accumulated earnings and profits and Angora had $300,000.How does Yoko treat the exchange for tax purposes?

A) As a recognized $50,000 long-term capital gain.
B) As a $50,000 dividend.
C) As a $20,000 dividend and a $30,000 capital gain.
D) As a $30,000 dividend and a $20,000 capital gain.
E) None of the above.

Question 52

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 $150,000,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?

A) $50,000.
B) $100,000.
C) $150,000.
D) $200,000.
E) None of the above.

Question 53

The stock in Camel Corporation is owned by Albert and Tomoko,who are unrelated.Albert owns 30% and Tomoko owns 70% of the stock in Camel Corporation.All of Camel Corporation's assets were acquired by purchase.The following assets are to be distributed in complete liquidation of Camel Corporation:

Question 54

One of the tenets of U.S.tax policy is to encourage business development.Which of the following Code sections does not support this tenet?

A) Section 351, which allows entities to incorporate tax-free.
B) Section 1031, which allows the exchange of stock of one corporation for stock of another.
C) Section 368, which allows for tax-favorable corporate restructuring through mergers and acquisitions.
D) Section 381, which allows the target corporation's tax benefits to carryover to the successor corporation.
E) All of the above provisions support the tenet.

Question 55

Bobcat Corporation redeems all of Zeb's 4,000 shares and distributes to him 2,000 shares of Van Corporation stock plus $50,000 cash.Zeb's basis in his 20% interest in Bobcat is $100,000 and the stock's value is $250,000.At the time Bobcat is acquired by Van,the accumulated earnings and profits of Bobcat are $200,000 and Van's are $75,000.How does Zeb treat this transaction for tax purposes?

A) No gain is recognized by Zeb in this reorganization.
B) Zeb reports a $50,000 recognized dividend.
C) Zeb reports a $50,000 recognized capital gain.
D) Zeb reports a $40,000 recognized dividend and a $10,000 capital gain.
E) Not enough information is available to determine proper treatment.

Question 56

The stock of Cardinal Corporation is held as follows: 90% by Blue Jay Corporation (basis of $500,000)and 10% by Samuel (basis of $70,000).Cardinal Corporation is liquidated on October 20,2011,pursuant to a plan adopted on January 7,2011.Pursuant to the liquidation,Cardinal Corporation distributed Asset A (basis of $450,000,fair market value of $720,000)to Blue Jay,and Asset B (basis of $45,000,fair market value of $80,000)to Samuel.No election is made under § 338.With respect to the liquidation of Cardinal:

A) Cardinal Corporation recognizes a gain of $35,000.
B) Blue Jay has a basis in Asset A of $720,000.
C) Samuel recognizes no gain (or loss).
D) Blue Jay recognizes a gain of $220,000.
E) None of the above.

Question 57

Which of the following statements is correct with respect to the § 338 election?

A) The subsidiary corporation makes the § 338 election.
B) A qualified stock purchase occurs when a corporation acquires, in a taxable transaction, at least 80% of the stock (voting power and value) of another corporation within a 18-month period.
C) The subsidiary corporation must be liquidated pursuant to the § 338 election.
D) For purposes of the qualified stock purchase requirement, subsidiary corporation stock acquired by any member of an affiliated group that includes the parent corporation is considered acquired by the parent.
E) None of the above.

Question 58

Korat Corporation and Snow Corporation enter into an acquisitive "Type D" reorganization.Xin currently holds a 20-year,$10,000 Snow bond paying 4% interest.There are 8 years until the bond matures.In exchange for his Snow bond,Xin receives an 8 year $16,000 Korat bond paying 2.5% interest.Xin thinks this is fair because he will still receive $400 of interest each year and both bonds mature on the same date.How does Xin treat this transaction on his tax return?

A) Xin recognizes no gain or loss on the exchange of bonds.
B) Xin recognizes $750 gain each year for the next 8 years.
C) Xin recognizes $6,000 capital gain.
D) Xin recognizes $6,000 ordinary gain.
E) None of the above.

Question 59

During the current year,Goldfinch Corporation purchased 100% of the stock of Dove Corporation and made a qualified election under § 338.Which of the following statements is incorrect with respect to the § 338 election?

A) Goldfinch is treated as having bought all of Dove's assets on the qualified stock purchase date.
B) If Dove is liquidated, Goldfinch will have a basis in the assets received equal to Dove's basis in the assets.
C) Dove is treated as a new corporation as of the day following the qualified stock purchase date.
D) Dove can recognize gain or loss as a result of the § 338 election.
E) None of the above.

Question 60

Three years ago,Loon Corporation purchased 100% of the stock of Pelican Corporation for $950,000.Currently,Pelican Corporation has assets with a basis of $1.1 million and a fair market value of $1.3 million.If Loon liquidates Pelican,what basis will Loon have in the assets it acquires from Pelican Corporation?

A) $0.
B) $950,000.
C) $1.1 million.
D) $1.3 million.
E) None of the above.

Question 61

The text discusses four different limitations on loss recognition by liquidating corporations.Provide a brief description of each of these loss limitations.

Question 62

Cocoa Corporation is acquiring Milk Corporation in a "Type A" reorganization by exchanging 40% of its voting stock and $50,000 for all of Milk's assets (value of $850,000 and basis of $600,000)and liabilities ($200,000).The shareholders of Milk are Elsie (650 shares)and Ferdinand (350 shares).They bought their stock for $500 per share.What is the value of the stock that Elsie and Ferdinand received from Cocoa? What is the amount of gains or losses they will recognize due to the reorganization and what is their basis in the Cocoa stock?

Question 63

There are several different types of corporate reorganizations allowed by the Internal Revenue Code.Provide a brief description of each type.

Question 64

Explain how the tax treatment for parties involved in a tax-free reorganization almost exactly parallels the treatment under the like-kind exchange provisions of § 1031.

Question 65

Lyon has 100,000 shares outstanding that are worth $10 per share.It uses 32% of its stock plus $80,000 to acquire Zebra Corporation in a "Type A" reorganization.Zebra's assets are valued at $400,000 and its accumulated earnings and profits are $25,000 at the time of the reorganization.The Lyon shares and cash are distributed to the Zebra shareholders as follows.Jake (owning 62.5% of Zebra)receives 18,000 shares (value $180,000)and $70,000.Kara (owning 37.5% of Zebra)receives 14,000 shares (value $140,000)and $10,000.Jake and Kara each recognize gains to the extent of the cash they received.What is the character of Jake's and Kara's gains?

Question 66

Once a gain is recognized in a corporate reorganization,its character must be determined.What are the different tax character possibilities that a corporate reorganization gain may trigger?

Question 67

Discuss the role of letter rulings in corporate reorganizations.

Question 68

What are the tax consequences of a § 332 liquidation to the parent corporation,subsidiary corporation,and minority shareholder?

Question 69

Describe the requirements for and tax consequences of a § 338 election.

Question 70

On April 16,2010,Blue Corporation purchased 15% of the Gold Corporation stock outstanding.Blue Corporation purchased an additional 50% of the stock in Gold on November 23,2010,and an additional 20% on May 4,2011.On September 23,2011,Blue Corporation purchased the remaining 15% of Gold Corporation stock outstanding.