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

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Question 31

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On March 15,2015,Blue Corporation purchased 10% of the Gold Corporation stock outstanding.Blue Corporation purchased an additional 40% of the stock in Gold on October 23,2015,and an additional 25% on April 4,2016.On July 23,2016,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?

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Question 32

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

A) The subsidiary corporation makes the § 338 election.
B) A qualified stock purchase occurs when a corporation acquires, in a taxable transaction, at least 80% of the stock (voting power and value) of another corporation within an18-month period.
C) The parent recognizes no gain (loss) as a result of the election.
D) Gain, but not loss, is recognized by the subsidiary as a result of a deemed sale of its assets.
E) None of the above.

F) A) and B)
G) D) and E)

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Question 33

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If a parent corporation makes a § 338 election,the subsidiary corporation recognizes gain but not loss on the deemed sale of its assets on the qualified stock purchase date.

During the current year,Goldfinch Corporation purchased 100% of the stock of Dove Corporation and made a qualified election under § 338.Which of the following statements is incorrect with respect to the § 338 election?

The related-party loss limitation in a complete liquidation applies only to distributions of property while the built-in loss limitation can apply to a distribution or sale of property.

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

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

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 $850,000,the same as Brown's basis in its Green stock.

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.

Tax planning motivations usually predominate over other objectives in deciding whether to create a trust.

Sparrow Corporation purchased 90% of the stock of Warbler Corporation eight years ago for $1 million.In the current year,Sparrow liquidates Warbler and acquires assets with a basis to Warbler of $850,000 (fair market value of $1.2 million).Sparrow will have a basis in the assets of $850,000 (Warbler's basis in the assets),and no recognized gain or loss.

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

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?

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?

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?

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?

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

In the current year,Dove Corporation (E & P of $1 million) distributes all of its property in a complete liquidation.Alexandra,a shareholder,receives land having a fair market value of $200,000.Dove Corporation had purchased the land as an investment three years ago for $125,000,and the land was distributed subject to a $100,000 liability.Alexandra took the land subject to the $100,000 liability.What is Alexandra's basis in the land?

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?

Explain whether shareholders are exempted from gain/loss recognition in nontaxable corporate reorganization or the gain/loss recognition is merely postponed.If postponed,what is the vehicle for ensuring the postponed gain/loss will be recognized in the future?