Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

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?

Accepted Answer

A)  $0 
B)  $120,000 loss 
C)  $450,000 gain 
D)  $570,000 gain 
E)  None of the above

Question 3

Gains and losses are recognized by the liquidating corporation on distributions to a minority shareholder in a § 332 liquidation.

Accepted Answer

A) True 
 B)False

Question 4

Ruby Corporation has announced plans to liquidate. Bronze Corporation owns 85% of Ruby's stock. If Bronze wants to avoid the nontaxable treatment associated with a § 332 liquidation (e.g., nonrecognition of loss), it could reduce its stock ownership in Ruby to below 80%.

Accepted Answer

A) True 
 B)False

Question 5

Scarlet Corporation, the parent corporation, has a basis of $600,000 in the stock of Brown Corporation, a subsidiary in which it owns 90% of all classes of stock. Scarlet purchased the stock in Brown Corporation 10 years ago. In the current year, Scarlet Corporation liquidates Brown Corporation and acquires assets worth $800,000 and with a tax basis to Brown Corporation of $950,000. What basis will Scarlet Corporation have in the assets acquired from Brown Corporation?

Accepted Answer

A)  $0 
B)  $600,000 
C)  $800,000 
D)  $950,000 
E)  None of the above

Question 6

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?

Accepted Answer

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

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

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.

Question 10

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:

Accepted Answer

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.

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

Target shareholders recognize gain or loss when they receive assets (boot) as well as stock in the acquiring corporation in a transaction meeting the § 368 requirements.

Accepted Answer

A) True 
 B)False

Question 13

Purple Corporation has two equal shareholders, Joshua and Ellie, who are father and daughter. One year ago, the two shareholders transferred properties to Purple in a § 351 exchange. Joshua transferred land (basis of $600,000, fair market value of $450,000) and securities (basis of $70,000, fair market value of $250,000), while Ellie transferred equipment (basis of $420,000, fair market value of $700,000). In the current year, Purple Corporation adopts a plan of liquidation, sells all of its assets, and distributes the proceeds pro rata to Joshua and Ellie. The only loss realized upon disposition of the properties was with respect to the land that had decreased in value to $310,000 and was sold for this amount. Purple never used the land for any business purpose during the time it was owned by the corporation. What amount of loss can Purple Corporation recognize on the sale of the land?

Accepted Answer

A)  $0 
B)  $140,000 
C)  $150,000 
D)  $290,000 
E)  None of the above

Question 14

The stock in Toucan Corporation is held equally by two brothers. Four years ago, the shareholders transfer property (basis of $200,000, fair market value of $220,000) to Toucan Corporation as a contribution to capital. In the current year and pursuant to a complete liquidation of Toucan, the property is distributed proportionately to the brothers. At the time of the distribution, the property had a fair market value of $40,000. What amount of loss will Toucan Corporation recognize on the distribution of the property?

Accepted Answer

A)  $0 
B)  $20,000 
C)  $160,000 
D)  $180,000 
E)  None of the above

Question 15

On March 15, 2017, Blue Corporation purchased 10% of the Gold Corporation stock outstanding. Blue Corporation purchased an additional 40% of the stock in Gold on October 24, 2017, and an additional 25% on April 4, 2018. On July 25, 2018, 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?

Accepted Answer

The answer of On March 15, 2017, Blue Corporation purchased...

Question 16

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

Accepted Answer

The answer of Explain why the antistuffing rules were enacted...

Question 17

One similarity between the tax treatment accorded liquidating and nonliquidating distributions is with respect to a shareholder's basis in property received in such distributions. For each type of distribution, the shareholder's basis is the property's fair market value on the date of distribution.

Accepted Answer

A) True 
 B)False

Question 18

Pursuant to a complete liquidation, Rust Corporation distributes to its shareholders land with a basis of $150,000 and a fair market value of $400,000. The land is subject to a liability of $300,000. What is Rust's recognized gain on the distribution?

Accepted Answer

A)  $0. 
B)  $100,000. 
C)  $150,000. 
D)  $250,000. 
E)  None of the above.

Question 19

Legal dissolution under state law is required for a liquidation to be complete for tax purposes.

Accepted Answer

A) True 
 B)False

Question 20

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?

Accepted Answer

A)  No gain is recognized by Zed in this reorganization. 
B)  Zed reports a $50,000 recognized dividend. 
C)  Zed reports a $50,000 recognized capital gain. 
D)  Zed reports a $40,000 recognized dividend and a $10,000 capital gain. 
E)  Not enough information is available to determine proper treatment.

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

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?

Gains and losses are recognized by the liquidating corporation on distributions to a minority shareholder in a § 332 liquidation.

Ruby Corporation has announced plans to liquidate. Bronze Corporation owns 85% of Ruby's stock. If Bronze wants to avoid the nontaxable treatment associated with a § 332 liquidation (e.g., nonrecognition of loss), it could reduce its stock ownership in Ruby to below 80%.

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.

Which of the following statements is correct 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.

Target shareholders recognize gain or loss when they receive assets (boot) as well as stock in the acquiring corporation in a transaction meeting the § 368 requirements.

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

One similarity between the tax treatment accorded liquidating and nonliquidating distributions is with respect to a shareholder's basis in property received in such distributions. For each type of distribution, the shareholder's basis is the property's fair market value on the date of distribution.

Pursuant to a complete liquidation, Rust Corporation distributes to its shareholders land with a basis of $150,000 and a fair market value of $400,000. The land is subject to a liability of $300,000. What is Rust's recognized gain on the distribution?

Legal dissolution under state law is required for a liquidation to be complete for tax purposes.