Exam 6: Corporate Liquidating Distributions

Robot Corporation is liquidated, with Marty receiving property having an adjusted basis of $60,000 and an FMV of $90,000. The property is subject to an $80,000 mortgage, which Marty assumes. Marty's basis in the Robot stock surrendered is $50,000. Marty must recognize

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Question 1

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When a liquidating corporation pays off an unsecured debt obligation,

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Question 2

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Parent Corporation, which operates an electric utility, created a 100%- owned corporation, Subsidiary, that built and managed an office building. Assume the two corporations have filed separate tax returns for a number of years. The utility occupied two floors of the office building, and Subsidiary offered the other ten floors for lease. Only 25% of the total rental space was leased because of the high crime rate in the area surrounding the building. Rental income was insufficient to cover the mortgage payments, and Subsidiary filed for bankruptcy because of the poor prospects. Subsidiary's assets were taken over by the mortgage lender. Parent lost its entire $500,000 investment. At the time Subsidiary was liquidated, another $100,000 of debts remained unpaid for the general creditors, which included a $35,000 account payable to Parent. What tax issues should Parent and Subsidiary consider with respect to the bankruptcy and liquidation of Subsidiary?

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Question 3

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The managements of Parent and Subsidiary should consider the following tax issues:
• What gain or loss does Parent Corporation recognize on the transfer of its remaining property to the mortgage lender?
• Does Subsidiary Corporation have to recognize cancellation of indebtedness income from not having its debts?
• Does Subsidiary Corporation have to file a corporate tax return for the portion of the final tax year tha in existence? If so, what income and expenses are included in the return?
• Can Subsidiary Corporation deduct the liquidation expenses on its final tax return?
• What is the amount and character of the loss that Parent Corporation recognizes upon surrendering it Subsidiary stock? Upon not being repaid for the open account indebtedness?
• What happens to Subsidiary Corporation's tax attributes?
Because Parent Corporation received nothing for its investment in Subsidiary Corporation, it can claim a worthless security loss for the $500,000 investment. This loss should be an ordinary loss under Sec. 165(g)( Subsidiary's $35,000 debt to Parent should be deductible as a bad debt under Sec. 166. Because corporation not have a distinction between business and nonbusiness debts, Subsidiary can claim an ordinary loss deduction for the bad debt in its final tax return.

Parent Corporation owns 100% of the single class of stock of Subsidiary Corporation. Parent's basis in the Subsidiary stock is $500,000 when Parent completely liquidates Subsidiary Corporation within a single tax year. The Subsidiary Corporation assets have a $700,000 adjusted basis and an $800,000 FMV at liquidation. As a result of the liquidation, Parent must recognize a

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Question 4

Jack Corporation is owned 75% by Sherri and 25% by Mark. Sherri and Mark have $125,000 and $50,000 bases in their stock, respectively. Jack Corporation adopts a plan of liquidation on March 1. On April 12, Sherri receives the following property as a liquidating distribution: cash of $30,000; land, $125,000 FMV; and 150 shares of Green Corporation stock, $30,000 FMV. The land is subject to a $20,000 mortgage. On the same date, Mark receiv $10,000 FMV of Green stock (50 shares) and cash of $45,000 as a liquidating distribution. The land has a basis of $ and the stock has a basis of $70,000 in Jack Corporation's hands. Both are capital assets to Jack Corporation and h been held for a number of years. a) What is the amount and character of Jack Corporation's recognized gain or loss on the liquidating distributio b) What are the amounts and characters of Sherri and Mark's recognized gains or losses? c) What are the bases of the land and stock to Sherri and Mark?

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Question 5

Parent Corporation owns 70% of Sam Corporation's single class of stock. This year, Parent Corporation purchases for cash the remaining 30% of Sam Corporation's stock from four individual investors pursuant to a tender offer. A plan of liquidation is approved by Sam Corporation's shareholders during the last month of this year, and Sam Corporation's assets are distributed by year- end to Parent Corporation in exchange for all of Sam's outstanding stock. Parent Corporation should

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Question 6

In a complete liquidation, a liability assumed by a shareholder reduces the shareholder's amount realized.

(True/False)

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Question 7

In a Sec. 332 liquidation, what bases do both the parent and minority shareholders take in the assets received?

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Question 8

During 2017, Track Corporation distributes property to Cindy as part of a complete liquidation. Property included in the distribution is $30,000 in cash, land with a $40,000 adjusted basis and a $60,000 FMV, and a copyright without an ascertainable FMV and having a zero basis. The first payment to Cindy of $8,000 for use of the copyrighted property occurs in 2018. Cindy has a basis in the Track stock of $95,000 immediately preceding the liquidation. The minimum amount of gain that Cindy must recognize is a

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Question 9

Hope Corporation was liquidated four years ago. Teresa reported a $40,000 long- term capital gain due to the liquidation on her individual tax return. This year, Teresa pays $6,000 as part of the settlement of a lawsuit against Hope. Due to the $6,000 payment, Teresa recognizes a

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Question 10

Identify which of the following statements is true.

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Question 11

Under what circumstances does a liquidating corporation not recognize a gain or loss when making a distribution?

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Question 12

Generally, a corporation recognizes a gain, but not a loss, on a liquidating distribution.

(True/False)

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Question 13

Carly owns 25% of Base Corporation's single class of stock and Premier Corporation owns the remaining 75%. Carly's basis in the Base stock is $200,000 and Premier Corporation's basis in the Base stock is $600,000. Carly receives property with a $175,000 adjusted basis and a $250,000 FMV and Premier Corporation receives property with a $600,000 adjusted basis and a $750,000 FMV in complete liquidation of Base Corporation. All of Base's cash is used to pay its liabilities. Which of following statements is correct concerning the tax effects of the liquidation?

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Question 14

What are the tax consequences to Parent Corporation when Parent Corporation, which owns 75% of Subsidiary Corporation's single class of stock, purchases for cash the remaining 25% of the Subsidiary stock from three individual shareholders pursuant to a tender offer? Three months later as part of an approved plan of liquidation, Subsidiary's assets are distributed to Parent Corporation in exchange for all of Subsidiary's outstanding stock.

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Question 15

Identify which of the following statements is true.

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Question 16

A subsidiary must recognize depreciation recapture income when the subsidiary is liquidated into the parent.

(True/False)

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Question 17

Lake City Corporation owns all of the stock in Columbia Corporation. Pursuant to a plan of complete liquidation, Columbia distributes land having a $500,000 FMV and a $200,000 basis to Lake City. Lake City's basis in the land will be

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Question 18

Why should a corporation that is 100% owned by another corporation be treated differently when it liquidates than a corporation that is 100% owned by an individual?

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Question 19

Property received in a corporate liquidation by a noncorporate shareholder has

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Question 20

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Robot Corporation is liquidated, with Marty receiving property having an adjusted basis of $60,000 and an FMV of $90,000. The property is subject to an $80,000 mortgage, which Marty assumes. Marty's basis in the Robot stock surrendered is $50,000. Marty must recognize

When a liquidating corporation pays off an unsecured debt obligation,

In a complete liquidation, a liability assumed by a shareholder reduces the shareholder's amount realized.

In a Sec. 332 liquidation, what bases do both the parent and minority shareholders take in the assets received?

Hope Corporation was liquidated four years ago. Teresa reported a $40,000 long- term capital gain due to the liquidation on her individual tax return. This year, Teresa pays $6,000 as part of the settlement of a lawsuit against Hope. Due to the $6,000 payment, Teresa recognizes a

Identify which of the following statements is true.

Under what circumstances does a liquidating corporation not recognize a gain or loss when making a distribution?

Generally, a corporation recognizes a gain, but not a loss, on a liquidating distribution.

Identify which of the following statements is true.

A subsidiary must recognize depreciation recapture income when the subsidiary is liquidated into the parent.

Lake City Corporation owns all of the stock in Columbia Corporation. Pursuant to a plan of complete liquidation, Columbia distributes land having a $500,000 FMV and a $200,000 basis to Lake City. Lake City's basis in the land will be

Why should a corporation that is 100% owned by another corporation be treated differently when it liquidates than a corporation that is 100% owned by an individual?

Property received in a corporate liquidation by a noncorporate shareholder has

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