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

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Question 1

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A corporation generally will recognize gain or loss on a liquidating distribution of installment notes to its shareholders.

A) True
B) False

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Question 2

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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.

A) True
B) False

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Question 3

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

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

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

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

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.

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.

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?

Penguin Corporation purchased bonds (basis of $190,000) 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 $200,000 (basis of $160,000) to Penguin.Which of the following statements is correct with respect to the distribution of land?

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.

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 a net operating loss carryover of $400,000. The net operating loss does not carry over to the parent.

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?

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:

Scarlet Corporation, the parent corporation, has a basis of $600,000 in the stock of Brown Corporation, a subsidiary in which it owns 90% of all classes of stock. Scarlet purchased the stock in Brown Corporation 10 years ago. In the current year, Scarlet Corporation liquidates Brown Corporation and acquires assets worth $800,000 and with a tax basis to Brown Corporation of $950,000. What basis will Scarlet Corporation have in the assets acquired from Brown Corporation?

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

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?

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.

The stock of Penguin Corporation is held as follows: 85% by Duck Corporation and 15% by Gerald, an individual. Penguin Corporation is liquidated in December of the current year, pursuant to a plan adopted earlier in the year. Penguin Corporation distributes land with a basis of $350,000 and fair market value of $390,000 to Gerald in liquidation of his stock interest. Gerald had a basis of $200,000 in his Penguin stock. How much gain will Penguin Corporation recognize in this liquidating distribution?

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?