Question 1

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?

Accepted Answer

The answer of On April 7,2010,Crow Corporation acquired land in...

Question 2

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 3

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

Accepted Answer

The answer of Debt security holders recognize gain when the...

Question 4

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?

Accepted Answer

When Tangerine Corporation distributes the land to its shareholders, it will recognize a loss equal to the difference between the fair market value of the property at the time of the contribution ($650,000) and the fair market value of the property at the time of the distribution ($500,000). This loss is allocated between the two shareholders based on their proportionate interest in the stock of the corporation. Therefore, the loss recognized by Tangerine Corporation is $40,000 (($650,000 - $500,000) x 40%)). Choice B is the correct answer.

Question 5

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?

Accepted Answer

The answer of During the current year,Ecru Corporation is liquidated...

Question 6

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

Accepted Answer

In order for a corporate restructuring to qualify as a tax-free reorganization, it must have a sound business purpose. This is a requirement set forth by the IRS in order to prevent companies from using tax-free reorganizations for purely tax-driven purposes.

Question 7

In 1916,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 In 1916,the Supreme Court decided that corporate...

Question 8

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.

Accepted Answer

The dividends received deduction allows corporate shareholders to deduct a portion of the dividends they receive from their taxable income. If a gain on a reorganization is treated as a dividend, it would be eligible for this deduction, reducing the shareholder's taxable income. However, if the gain is treated as a capital gain, it would not be eligible for the deduction, resulting in potentially higher taxes for the shareholder. Therefore, corporate shareholders would prefer to have a gain on a reorganization treated as a dividend rather than as a capital gain.

Question 9

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

Accepted Answer

The answer of Corporate reorganizations can meet the requirements to...

Question 10

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.

Accepted Answer

The answer of If the target corporation in a reorganization...

Question 11

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?

Accepted Answer

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

Question 12

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.

Accepted Answer

According to the Internal Revenue Code, gains recognized by shareholders in a corporate reorganization can be treated as dividends to the extent of the corporation's earnings and profits. This is known as the "dividend equivalence" principle. However, not all gains will be treated as dividends; only those that are attributable to earnings and profits will be treated as such.

Question 13

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?

Accepted Answer

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

Question 14

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

Accepted Answer

Corporate reorganizations, such as mergers or acquisitions, may qualify for non-recognition treatment under certain provisions of the tax code, similar to how like-kind exchanges of property can also qualify for non-recognition treatment. Both involve the transfer of assets or equity in exchange for other assets or equity, and may be treated as tax-deferred transactions.

Question 15

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

Accepted Answer

The answer of Noncorporate shareholders may elect out of §...

Question 16

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

Accepted Answer

According to the tax code, when an acquiring corporation uses property other than stock as consideration in a corporate reorganization, it must recognize any realized gains, but is not allowed to recognize any losses on the transaction. This rule applies to both the acquiring corporation and the target corporation involved in the reorganization.

Question 17

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?

Accepted Answer

The answer of Pursuant to a complete liquidation,Woodpecker Corporation distributes...

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 $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?

Accepted Answer

The basis of the land after the § 351 exchange is $400,000. Since the fair market value of the land when it was sold was $290,000, the corporation would recognize a loss of $110,000 ($290,000 - $400,000). This loss would be allocated equally between Joshua and Ellie, resulting in a loss of $55,000 each. However, since Joshua's basis in his Purple Corporation stock is only $20,000 ($400,000 land basis - $350,000 fair market value), he will only be able to deduct $20,000 of the $55,000 loss allocated to him, resulting in a recognized loss of $60,000 ($20,000 deduction + $40,000 remaining loss). Ellie, on the other hand, will be able to deduct the full amount of her allocated loss of $55,000, resulting in a recognized loss of $55,000. Therefore, the total recognized loss for Purple Corporation on the sale of the land is $115,000 ($60,000 + $55,000).

Question 19

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

Accepted Answer

The gain recognized by a shareholder in a corporate reorganization is the difference between the realized gain and the adjusted basis of the stock surrendered, not the boot received.

Question 20

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

Accepted Answer

Tax laws can have a significant impact on the success and efficiency of a corporate reorganization, as they can affect the timing, structure, and financial implications of the reorganization. Therefore, it is important to take them into account when planning the structure of the reorganization.

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