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Federal Taxation II Chapter 20 Review Questions

Federal Taxation II Chapter 20 Review Questions

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04/02/2014

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CHAPTER 20CORPORATIONS: DISTRIBUTIONS IN COMPLETE LIQUIDATIONAND AN OVERVIEW OF REORGANIZATIONS
TRUE/FALSE
1.A liquidation can occur for tax purposes even though the corporation has retained some assets to payremaining debts and preserve legal status.ANS:TREF:p. 20-22.One difference between the tax treatment accorded nonliquidating and liquidating distributions is withrespect to the basis of property received in the distributions. In a nonliquidating distribution (e.g.,qualifying stock redemption), the shareholder takes a basis in the property equal to the corporation’s basis in the property, while the basis of property acquired in a liquidation is its fair market value on thedate of the distribution.ANS:FThe basis of property acquired in both nonliquidating and liquidating distributions is its fair market valueon the date of the distribution.PTS:1REF:p. 20-43.As a general rule, a liquidating corporation recognizes gains and losses on the distribution of property incomplete liquidation.ANS:TGain
and 
loss recognition is the general rule for the liquidating corporation.PTS:1REF:p. 20-44.For purposes of the related-party loss limitation in the context of a liquidating distribution, a corporationand a shareholder are considered related if the shareholder owns (directly or indirectly) more than 50% invalue of the corporation’s outstanding stock.ANS:TREF:p. 20-55.In a corporate liquidation, the built-in loss limitation can apply to sales of property in addition toliquidating distributions of property.ANS:TREF:p. 20-7
20-1
 
20-22008 Comprehensive Volume/Test Ban
6.In a complete liquidation (not a parent-subsidiary liquidation), a shareholder typically recognizesdividend income equal to his or her share (i.e., stock ownership percentage) of the liquidatingcorporation’s E & P.ANS:FCapital gain or loss is the typical result to a shareholder in a complete liquidation, based on the difference between the fair market value of the assets received in the distribution and the basis of the stock surrendered. The liquidating corporation’s E & P is irrelevant for purposes of determining the taxconsequences to the shareholder.PTS:1REF:p. 20-97.A shareholder may defer gain, to the point of collection, on the receipt of installment notes obtained in aliquidating distribution.ANS:TREF: p. 20-9 | Example 148.Section 332 cannot apply to a parent-subsidiary liquidation if the subsidiary corporation is insolvent onthe date of the liquidation.ANS:TREF: p. 20-10 | Footnote 119.Gains but not losses are recognized by a subsidiary corporation on liquidating distributions to a minorityshareholder in a § 332 liquidation.ANS:TREF:p. 20-1010.Brown Corporation purchased 90% of the stock of Green Corporation five years ago for $800,000. In thecurrent year, Brown Corporation liquidates Green Corporation and acquires assets with a basis to GreenCorporation of $600,000 (fair market value of $900,000). Brown Corporation will have a basis in theassets of $800,000, the same as its basis in the Green stock.ANS:FBrown will have a basis in the assets equal to Green Corporation’s basis, or $600,000.PTS:1REF:p. 20-1111.A subsidiary is liquidated pursuant to § 332. The parent has held 100% of the stock in the subsidiary for the past ten years. The subsidiary has a business credit carryover of $30,000 at the time of liquidation.The parent does not acquire the business credit carryover.ANS:FUnder § 381, a parent acquires a subsidiary’s tax attributes, including the subsidiary’s business creditcarryover.PTS:1REF:p. 20-1212.For purposes of the § 338 election, a corporation must acquire, in a taxable transaction, at least 80% of the stock (voting power and value) of another corporation within an 12-month period.ANS:TREF:p. 20-12
 
Corporations: Complete Liquidation and Reorganizations20-3
13.Gains and losses are recognized to a subsidiary corporation if the parent corporation makes the § 338election.ANS:TREF:p. 20-13 | Concept Summary 20-114.If a parent corporation makes a § 338 election, the subsidiary is treated as a new corporation as of the dayfollowing the qualified stock purchase date.ANS:TREF:p. 20-1315.If a parent corporation makes a § 338 election, the subsidiary corporation must be liquidated.ANS:FThe subsidiary corporation may, but need not, be liquidated as a result of the § 338 election. If thesubsidiary is liquidated, the parent obtains the subsidiary’s assets with the stepped-up (or -down) basis.PTS:1REF:p. 20-13 | Concept Summary 20-116.United States tax policy tries to encourage business development.ANS:TREF:p. 20-1417.Currently, merger and acquisition activity is in a declining mode.ANS:FCurrently, U.S. merger and acquisition activity is in an increasing mode.PTS:1REF:p. 20-1418.The auto parts industry has seen several major bankruptcies in the past few years.ANS:TREF:p. 20-1519.Noncorporate shareholders would prefer to have a gain on a corporate reorganization treated as a capitalgain rather than as a dividend, because of the lower tax rates applied to capital gains.ANS:FDividends and capital gains are taxed at the same rates.PTS:1REF:p. 20-1520.For a corporate restructuring to qualify as a tax-free reorganization, the transaction must comply with thestep transaction doctrine.ANS:FThe step transaction doctrine should not apply.PTS:1REF:p. 20-1521.The tax treatment of reorganizations almost parallels the treatment given to related party exchanges.ANS:FThe rules for tax-free reorganizations and like-kind exchanges are almost parallel.PTS:1REF:p. 20-15

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