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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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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 a 18-month period.
C) The subsidiary corporation must be liquidated pursuant to the § 338 election.
D) For purposes of the qualified stock purchase requirement, subsidiary corporation stock acquired by any member of an affiliated group that includes the parent corporation is considered acquired by the parent.
E) None of the above.

F) A) and C)
G) B) and D)

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D

Question 2

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Lyon has 100,000 shares outstanding that are worth $10 per share.It uses 32% of its stock plus $80,000 to acquire Zebra Corporation in a "Type A" reorganization.Zebra's assets are valued at $400,000 and its accumulated earnings and profits are $25,000 at the time of the reorganization.The Lyon shares and cash are distributed to the Zebra shareholders as follows.Jake (owning 62.5% of Zebra)receives 18,000 shares (value $180,000)and $70,000.Kara (owning 37.5% of Zebra)receives 14,000 shares (value $140,000)and $10,000.Jake and Kara each recognize gains to the extent of the cash they received.What is the character of Jake's and Kara's gains?

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If Jake had received only stock,he would...

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Question 3

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The stock of Tan Corporation (E & P of $1.3 million)is owned as follows: 90% by Egret Corporation (basis of $520,000),and 10% by Zoe (basis of $55,000).Both shareholders acquired their shares in Tan more than six years ago.In the current year,Tan Corporation liquidates and distributes land (fair market value of $1.1 million,basis of $750,000)and equipment (fair market value of $700,000,basis of $410,000)to Egret Corporation,and securities (fair market value of $200,000,basis of $150,000)to Zoe.What are the tax consequences of these distributions to Egret,to Tan,and to Zoe?

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 $400,000,fair market value of $350,000) and securities (basis of $20,000,fair market value of $80,000) ,while Ellie transferred equipment (basis of $220,000,fair market value of $430,000) .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 undeveloped land that had decreased in value to $290,000 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?

Legal dissolution under state law is not required for a liquidation to be complete for tax purposes.

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?

There are several different types of corporate reorganizations allowed by the Internal Revenue Code.Provide a brief description of each type.

One of the tenets of U.S.tax policy is to encourage business development.Which of the following Code sections does not support this tenet?

For a corporate restructuring to qualify as a tax-free reorganization,the transaction must have a sound business purpose.

On April 16,2010,Blue Corporation purchased 15% of the Gold Corporation stock outstanding.Blue Corporation purchased an additional 50% of the stock in Gold on November 23,2010,and an additional 20% on May 4,2011.On September 23,2011,Blue Corporation purchased the remaining 15% of Gold Corporation stock outstanding.

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?

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 a recognized loss of $150,000 ($1 million basis in Warbler stock - $850,000 carryover basis in assets).

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?

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

Penguin Corporation purchased bonds (basis of $95,000) 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 $100,000 (basis of $110,000) to Penguin.Which of the following statements is correct with respect to the distribution of land?

Yoko purchased 10% of Toyger Corporation's stock six years ago for $70,000.In a transaction qualifying as a "Type C" reorganization,Yoko received $50,000 cash and 8% of Angora Corporation's stock (valued at $100,000) in exchange for her Toyger stock.Prior to the reorganization,Toyger had $200,000 accumulated earnings and profits and Angora had $300,000.How does Yoko treat the exchange for tax purposes?

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

The gains shareholders recognize as a part of a corporate reorganization may be treated a dividend to the extent of the corporation's earnings and profits.

Discuss the role of letter rulings in corporate reorganizations.

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.