Question 1

One similarity between the tax treatment accorded liquidating and nonliquidating distributions is with respect to a shareholder's basis in property received in such distributions. For each type of distribution, the shareholder's basis is the property's fair market value on the date of distribution.

Accepted Answer

The basis of property received in a liquidating or nonliquidating distribution is the property's fair market value on the date of distribution.

Question 2

The related-party loss limitation applies to distributions to related parties and either the distribution is pro rata or the property distributed is disqualified property.

Accepted Answer

False

Question 3

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

Accepted Answer

The related-party loss limitation specifically restricts the recognition of losses on distributions of property to related parties in a complete liquidation, whereas the built-in loss limitation can apply more broadly to both distributions and sales of property, aiming to prevent the shifting of tax losses among related entities.

Question 4

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.

Accepted Answer

In an asset purchase, the buyer can select specific assets to acquire and avoid taking on the seller's liabilities, unlike in a stock purchase where the buyer acquires the company as a whole, including its liabilities.

Question 5

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.

Accepted Answer

The built-in loss limitation is designed to prevent the recognition of losses that are attributable to a decline in the property's fair market value after its transfer to the corporation, thus it does not apply to such losses.

Question 6

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 recognizes gain or loss on the transfer of property in satisfaction of indebtedness.

Accepted Answer

In a §332 liquidation, the parent corporation does not recognize gain or loss on the receipt of property, but the subsidiary may recognize gain or loss on the distribution of property in satisfaction of indebtedness.

Question 7

If a parent corporation makes a § 338 election, the subsidiary corporation recognizes gain but not loss on the deemed sale of its assets on the qualified stock purchase date.

Accepted Answer

The answer of If a parent corporation makes a §...

Question 8

If a parent corporation makes a § 338 election, the subsidiary corporation must be liquidated.

Accepted Answer

A § 338 election allows a parent corporation to treat the purchase of a subsidiary's stock as an asset acquisition for tax purposes, without requiring the actual liquidation of the subsidiary.

Question 9

Section 332 can apply to a parent-subsidiary liquidation even if the subsidiary corporation is insolvent on the date of the liquidation.

Accepted Answer

The answer of Section 332 can apply to a parent-subsidiary...

Question 10

Legal dissolution under state law is required for a liquidation to be complete for tax purposes.

Accepted Answer

A legal dissolution under state law is not required for a liquidation to be complete for tax purposes; the key factor is the distribution of assets to shareholders.

Question 11

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 no recognized gain or loss.

Accepted Answer

In a liquidation of a subsidiary into a parent corporation under IRC Section 332, the parent corporation takes a carryover basis in the subsidiary's assets, which is the same as the subsidiary's basis, and no gain or loss is recognized.

Question 12

A liquidation can occur for tax purposes even though the corporation has retained some assets to pay remaining debts and preserve legal status.

Accepted Answer

For tax purposes, a liquidation can be considered to have occurred even if the corporation retains some assets to settle remaining debts and maintain its legal status, as the key factor is the intent to dissolve the business and distribute its assets.

Question 13

Pursuant to a liquidation, Coral Corporation distributes to Lucinda, a shareholder, land (basis of $90,000, fair market value of $200,000). The land is subject to a $75,000 liability. Lucinda will have a basis of $125,000 in the land.

Accepted Answer

Lucinda's basis in the land will be $90,000, which is Coral Corporation's basis in the land. The liability does not affect the basis of the property received in the distribution.

Question 14

Gains and losses are recognized by the liquidating corporation on distributions to a minority shareholder in a § 332 liquidation.

Accepted Answer

In a § 332 liquidation, gains and losses are generally not recognized by the liquidating corporation on distributions to a 100% (or controlling) shareholder, not to a minority shareholder. The specific non-recognition rule applies to liquidations where the parent corporation owns at least 80% of the stock.

Question 15

As a general rule, a liquidating corporation recognizes gains but not losses on the distribution of property in complete liquidation.

Accepted Answer

The answer of As a general rule, a liquidating corporation...

Question 16

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 $850,000, the same as Brown's basis in its Green stock.

Accepted Answer

Brown Corporation's basis in the assets acquired from Green Corporation will be the assets' fair market value of $1.1 million, not the $850,000 basis Brown had in its Green stock. When a parent company liquidates a subsidiary and acquires its assets, the basis of those assets in the hands of the parent is generally their fair market value at the time of the acquisition.

Question 17

If a parent corporation makes a § 338 election, the subsidiary corporation is treated as a new corporation as of the day following the qualified stock purchase date.

Accepted Answer

A § 338 election allows a parent corporation that has made a qualified stock purchase of a subsidiary to treat the purchase as an asset acquisition for tax purposes, effectively treating the subsidiary as a new corporation starting the day after the purchase.

Question 18

If a liquidation qualifies under § 332, any minority shareholder will recognize gain or loss equal to the difference between the fair market value of assets received and the basis of the shareholder's stock.

Accepted Answer

In a § 332 liquidation, the parent corporation does not recognize gain or loss, but minority shareholders do recognize gain or loss on the difference between the fair market value of assets received and their stock basis.

Question 19

A subsidiary is liquidated pursuant to § 332. The parent has held 100% of the stock in the subsidiary for the past 10 years. The subsidiary has a net operating loss carryover of $400,000. The net operating loss does not carry over to the parent.

Accepted Answer

The answer of A subsidiary is liquidated pursuant to §...

Question 20

Liquidation expenses incurred by a corporation are generally deductible as § 162 trade or business expenses.

Accepted Answer

Liquidation expenses incurred by a corporation can be deductible as § 162 trade or business expenses if they are ordinary and necessary expenses paid or incurred in carrying on any trade or business. This includes costs directly associated with the process of liquidating the business.

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