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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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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.

F) A) and B)
G) A) and C)

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Question 2

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

A) True
B) False

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Question 3

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Mary and Jane,unrelated taxpayers,own Gray Corporation's stock equally.One year before the complete liquidation of Gray,Mary transfers land (basis of $200,000,fair market value of $130,000) 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 $100,000.In liquidation,Gray distributes the land to Jane.At the time of the liquidation,the land is worth $110,000. a.How much loss,if any,may Gray Corporation recognize on the distribution of the land to Jane? b.Assume that the transfer of land to Gray Corporation was made so that the corporation could subdivide the land and build residential housing.However,a subsequent deterioration of the housing market forced Gray Corporation to abandon its plans.What amount of loss may Gray Corporation recognize on the distribution of the land to Jane?

The stock of Loon Corporation is held as follows: 85% by Duck Corporation and 15% by Gerald,an individual.Loon Corporation is liquidated in December of the current year,pursuant to a plan adopted earlier in the year.Loon 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 Loon stock.How much gain will Loon Corporation recognize in this liquidating distribution?

Cotinga Corporation is acquiring Petrel Corporation through a "Type C" reorganization by exchanging 20% of its voting stock and $50,000 for all of Petrel's assets (value of $800,000 and basis of $600,000) and liabilities ($100,000).Jerrika owns 48% of Petrel (basis $270,000),and Allen owns the remaining 52% (basis $380,000).They exchange their stock in Petrel for their proportionate shares of the Cotinga stock and cash.What is the value of the Cotinga stock received by Jerrika and Allen? What are the amounts of gains/losses each recognizes due to the reorganization? What is Jerrika's and Allen's basis in the Cotinga stock?

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

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

Bobcat Corporation redeems all of Zed's 4,000 shares and distributes to him 2,000 shares of Van Corporation stock plus $50,000 cash.Zed'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 of Van are $75,000.How does Zed treat this transaction for tax purposes?

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.

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.

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

Explain why the antistuffing rules were enacted to limit the deductibility of losses realized by a corporation upon liquidation.

On March 15,2013,Blue Corporation purchased 10% of the Gold Corporation stock outstanding.Blue Corporation purchased an additional 40% of the stock in Gold on October 24,2013,and an additional 25% on April 4,2014.On July 23,2014,Blue Corporation purchased the remaining 25% of Gold Corporation stock outstanding. a.For purposes of the § 338 election,on what date does a qualified stock purchase occur? b.What is the due date for making the § 338 election?

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.

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?

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.

A shareholder bought 10,000 shares of Coral Corporation for $50,000 several years ago.When the stock is valued at $90,000,Coral redeems the shares in exchange for 5,000 shares of Blush Corporation stock and a $10,000 Blush bond.This transaction meets the requirements of § 368.Which of the following statements is false with regard to this transaction?

Discuss the role of letter rulings in corporate reorganizations.

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.