Question 1

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

Accepted Answer

Reorganizations and like-kind exchanges are both subject to similar tax treatment under the Federal income tax code. Both involve the transfer of assets from one party to another in a specific format, which allows for tax deferral or exemption under certain circumstances.

Question 2

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 3

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

Capital gains are typically taxed at a lower rate than dividends, and shareholders can take advantage of the lower tax rate by reducing the taxable amount with their basis in the stock involved.

Question 4

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?
A) $0.
B) $20,000.
C) $160,000.
D) $180,000.
E) None of the above.

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 5

Obtaining a positive letter ruling from the IRS can ensure the desired tax treatment for parties contemplating a corporate reorganization.

Accepted Answer

A positive letter ruling from the IRS can provide certainty and assurance to parties involved in a corporate reorganization that the intended tax treatment will be recognized and accepted by the IRS. It is an important tool for avoiding costly disputes and potential tax liabilities.

Question 6

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?
A) Lilac Corporation would recognize no gain or loss on the liquidation.
B) Lilac Corporation would recognize a net capital gain of $320,000.
C) Lilac Corporation would recognize a net capital gain of $340,000 and an ordinary loss of $20,000.
D) Lilac Corporation would recognize a net capital gain of $340,000.
E) None of the above.

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 7

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 answer of Originally, the Supreme Court decided that corporate...

Question 8

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 9

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) $70,000.
E) None of the above.

Accepted Answer

The answer of Magenta Corporation acquired land in a §...

Question 10

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

Accepted Answer

This is true, according to Section 1031 of the Internal Revenue Code. If an acquiring corporation uses property other than stock as consideration in a corporate reorganization, the acquired corporation will recognize any gains on the transaction, but not any losses. This allows for tax deferral for the acquired corporation.

Question 11

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?
A) $0.
B) $80,000.
C) $90,000.
D) $170,000.
E) None of the above.

Accepted Answer

The answer of Last year Crow Corporation acquired land in...

Question 12

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 aspect of corporate restructurings, it is not the only factor that needs to be considered. Other factors such as tax implications, legal requirements, and financial considerations need to be taken into account as well.

Question 13

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 14

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 15

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

Shareholders may be treated as having received a dividend to the extent of the corporation's earnings and profits (E&P) when recognizing gains from a corporate reorganization. This is because any gain recognized by the corporation is considered a distribution of its earnings and profits that have not yet been taxed. Therefore, the gain is taxable as a dividend to the extent of the corporation's E&P.

Question 16

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?
A) $0.
B) $120,000 loss.
C) $450,000 gain.
D) $570,000 gain.
E) None of the above.

Accepted Answer

The answer of Pursuant to a complete liquidation, Oriole Corporation...

Question 17

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?
A) $0.
B) $45,000.
C) $225,000.
D) $275,000.
E) None of the above.

Accepted Answer

The answer of The stock in Rhea Corporation is owned...

Question 18

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?
A) $0.
B) $140,000.
C) $150,000.
D) $290,000.
E) None of the above.

Accepted Answer

When a corporation sells a depreciable asset that it received in a tax-free exchange, its recognized loss is limited to the asset's decreased fair market value since the time of the exchange. In this case, the land had decreased in value from $450,000 to $310,000, so the recognized loss is $140,000 ($450,000 - $310,000). Since Purple Corporation is a C corporation, it can recognize and deduct the loss on its tax return. As a result, the answer is B ($140,000).

Question 19

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 answer of The determination of whether a shareholder's gain...

Question 20

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

Accepted Answer

When a corporation acquires the assets of another corporation, the acquiring corporation's basis in those assets is increased by the amount of any gain recognized by the target corporation. This results in a step-up in basis for the acquiring corporation, which can be beneficial for tax purposes.

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

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

For a corporate restructuring to qualify as a tax-free reorganization, the step transaction doctrine must apply.

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.

Obtaining a positive letter ruling from the IRS can ensure the desired tax treatment for parties contemplating a corporate reorganization.

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

Since debt security holders do not own stock, they do not fall under the corporate reorganization rules.

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

For corporate restructurings, meeting the § 368 reorganization "Type" requirements is all that needs to be considered when planning the structure of the transaction.

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.

The amount of gain recognized by a shareholder in a corporate reorganization is based on the shareholder's proportionate share of E & P.

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.

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?

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.

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