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

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Question 1

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The stock of Lavender Corporation is held as follows: 80% by Jade Corporation (basis of $400,000) and 20% by Tiffany (basis of $100,000) .Lavender Corporation is liquidated in December of the current year,pursuant to a plan adopted earlier in the year.Pursuant to the liquidation,Lavender Corporation distributed Asset A (basis of $600,000,fair market value of $900,000) to Jade,and Asset B (basis of $250,000,fair market value of $225,000) to Tiffany.No election is made under § 338.With respect to the liquidation of Lavender:

A) Lavender recognizes a loss of $25,000 on the distribution of Asset B.
B) Jade has a basis in Asset A of $900,000.
C) Tiffany has a basis in Asset B of $225,000.
D) Jade recognizes a gain of $500,000.
E) Lavender recognizes a gain of $300,000 on the distribution of Asset A.

F) B) and E)
G) None of the above

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C

Question 2

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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.

A) True
B) False

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Question 3

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Individual shareholders would prefer to have a gain on a corporate reorganization treated as a capital gain rather than as a dividend,because they can reduce the amount taxable by their basis in the stock involved.

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.

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

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?

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.

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?

Dipper Corporation is acquiring Bulbul Corporation by exchanging 220,000 shares of Dipper stock and $80,000 cash for all of Bulbul's assets (valued at $500,000),liabilities ($200,000),and accumulated earnings and profits ($120,000).Betty purchased 40% of Bulbul five years ago for $60,000,and Keith purchased the remaining 60% for $90,000.What is the amount of the gain or loss that Betty and Keith recognize (if any),assuming that the exchange qualifies as a § 368 reorganization? What is the basis in their new Dipper stock?

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 $250,000,a fair market value of $650,000,and is subject to a liability of $500,000.Kena,who takes the land subject to the liability,has a basis of $120,000 in the Ecru stock.With respect to the distribution of the land,which of the following statements is correct?

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?

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.

The stock in Crimson Corporation is owned by Angel and Melawi,who are unrelated.Angel owns 60% and Melawi owns 40% of the stock.All of Crimson Corporation's assets were acquired by purchase.The following assets are to be distributed in complete liquidation of Crimson Corporation: ​ a.What gain or loss, if any, would Crimson Corporation recognize if it distributes the cash, inventory, and equipment to Angel and the land to Melawi? b.What gain or loss, if any, would Crimson Corporation recognize if it distributes the equipment and land to Angel and the cash and inventory to Melawi?

For a corporate restructuring to qualify as a tax-free reorganization,the step transaction doctrine must apply.

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?

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

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

The stock in Rhea Corporation is owned by Jennifer (80%) and Lucy (20%) ,mother and daughter.In a liquidation of the corporation in the current year,Rhea distributes land that it purchased two years ago for $675,000 to Lucy.The property has a fair market value on the date of distribution of $450,000.One year later,Lucy sells the land for $400,000.What loss,if any,will Rhea Corporation recognize with respect to the distribution of land?

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?

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?