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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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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?

A) $0.
B) $40,000.
C) $190,000.
D) $390,000.
E) None of the above.

F) All of the above
G) C) and D)

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Question 2

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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?

A) $0.
B) $40,000.
C) $60,000.
D) $100,000.
E) None of the above.

F) C) and E)
G) A) and E)

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Question 3

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

What will cause the corporations involved in a § 368 reorganization to recognize gain or loss? What will cause shareholders of the companies involved in the corporate reorganization to recognize gain or loss? If gain is recognized by shareholders, what are the different tax character possibilities?

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

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

On April 7, 2011, 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.Crow Corporation adopted a plan of liquidation on October 5, 2012.On December 7, 2012, 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 $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 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.

One difference between the tax treatment accorded nonliquidating and liquidating distributions is with respect to the recognition of losses by the distributing corporation. As a general rule, a corporation recognizes losses on liquidating distributions of depreciated property (fair market value less than basis) but not on nonliquidating distributions of such property.

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.

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

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.

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

Which of the following statements is true concerning all types of tax-free corporate reorganizations?

Compare the sale of a corporation's assets with a sale of its stock from the perspective of the seller.

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

For purposes of the § 338 election, a corporation must acquire, in a taxable transaction, at least 80% of the stock (voting power and value) of another corporation within an 12-month period.

Indigo has a basis of $1 million in the stock of Owl Corporation, a subsidiary in which it owns 100% of all classes of stock. Indigo purchased the stock in Owl 10 years ago. In the current year, Indigo liquidates Owl and acquires assets worth $1.2 million. At the time of its liquidation, Owl Corporation had a basis of $800,000 in the assets and E & P of $500,000.Which of the following statements is correct with respect to the liquidation?

The text discusses four different limitations on loss recognition by liquidating corporations. Provide a brief description of each of these loss limitations.

What are the tax consequences of a § 332 liquidation to the parent corporation, subsidiary corporation, and minority shareholder?