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CHAPTER 20 CORPORATIONS: DISTRIBUTIONS IN COMPLETE LIQUIDATION AND AN OVERVIEW OF REORGANIZATIONS

TRUE/FALSE 1. A liquidation can occur for tax purposes even though the corporation has retained some assets to pay remaining debts and preserve legal status. REF: p. 20-2

ANS: T 2.

One difference between the tax treatment accorded nonliquidating and liquidating distributions is with respect 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 the date of the distribution.

ANS: F The basis of property acquired in both nonliquidating and liquidating distributions is its fair market value on the date of the distribution. PTS: 1 REF: p. 20-4 3. As a general rule, a liquidating corporation recognizes gains and losses on the distribution of property in complete liquidation.

ANS: T Gain and loss recognition is the general rule for the liquidating corporation. PTS: 1 REF: p. 20-4 4. For purposes of the related-party loss limitation in the context of a liquidating distribution, a corporation and a shareholder are considered related if the shareholder owns (directly or indirectly) more than 50% in value of the corporation’s outstanding stock. REF: p. 20-5

ANS: T 5.

In a corporate liquidation, the built-in loss limitation can apply to sales of property in addition to liquidating distributions of property. REF: p. 20-7

ANS: T

20-1

The parent does not acquire the business credit carryover.000. 20-10 | Footnote 11 ANS: T 9. REF: p. 20-11 11.000. ANS: F Under § 381. For purposes of the § 338 election. Brown Corporation will have a basis in the assets of $800. a shareholder typically recognizes dividend income equal to his or her share (i.000. The liquidating corporation’s E & P is irrelevant for purposes of determining the tax consequences to the shareholder. REF: p. Section 332 cannot apply to a parent-subsidiary liquidation if the subsidiary corporation is insolvent on the date of the liquidation. Gains but not losses are recognized by a subsidiary corporation on liquidating distributions to a minority shareholder in a § 332 liquidation. 20-9 7. The parent has held 100% of the stock in the subsidiary for the past ten years.20-2 6.000 (fair market value of $900. A subsidiary is liquidated pursuant to § 332.e. ANS: T REF: p. In the current year. on the receipt of installment notes obtained in a liquidating distribution.000). ANS: F Brown will have a basis in the assets equal to Green Corporation’s basis. REF: p. 2008 Comprehensive Volume/Test Bank In a complete liquidation (not a parent-subsidiary liquidation). a corporation must acquire.000 at the time of liquidation. stock ownership percentage) of the liquidating corporation’s E & P. The subsidiary has a business credit carryover of $30. Brown Corporation purchased 90% of the stock of Green Corporation five years ago for $800. 20-9 | Example 14 ANS: T 8. PTS: 1 REF: p. to the point of collection. the same as its basis in the Green stock. PTS: 1 REF: p. including the subsidiary’s business credit carryover. in a taxable transaction. Brown Corporation liquidates Green Corporation and acquires assets with a basis to Green Corporation of $600. or $600. PTS: 1 REF: p. a parent acquires a subsidiary’s tax attributes. based on the difference between the fair market value of the assets received in the distribution and the basis of the stock surrendered.. ANS: F Capital gain or loss is the typical result to a shareholder in a complete liquidation. A shareholder may defer gain. 20-12 12. at least 80% of the stock (voting power and value) of another corporation within an 12-month period. 20-12 . 20-10 ANS: T 10.

ANS: T REF: p. 20-15 . United States tax policy tries to encourage business development. merger and acquisition activity is in a declining mode. the subsidiary is treated as a new corporation as of the day following the qualified stock purchase date. ANS: F Dividends and capital gains are taxed at the same rates. 20-15 21. PTS: 1 REF: p.Corporations: Complete Liquidation and Reorganizations 20-3 13. 20-14 18. U. If a parent corporation makes a § 338 election. ANS: F The step transaction doctrine should not apply. Noncorporate shareholders would prefer to have a gain on a corporate reorganization treated as a capital gain rather than as a dividend. PTS: 1 REF: p. If the subsidiary is liquidated.S. 20-14 17. the transaction must comply with the step transaction doctrine. 20-15 20. The tax treatment of reorganizations almost parallels the treatment given to related party exchanges. 20-13 15. PTS: 1 REF: p. be liquidated as a result of the § 338 election. 20-15 19. but need not. For a corporate restructuring to qualify as a tax-free reorganization. the parent obtains the subsidiary’s assets with the stepped-up (or -down) basis. Currently. If a parent corporation makes a § 338 election. ANS: F The rules for tax-free reorganizations and like-kind exchanges are almost parallel. 20-13 | Concept Summary 20-1 14. The auto parts industry has seen several major bankruptcies in the past few years. PTS: 1 REF: p. merger and acquisition activity is in an increasing mode. ANS: T REF: p. Gains and losses are recognized to a subsidiary corporation if the parent corporation makes the § 338 election. the subsidiary corporation must be liquidated. ANS: T REF: p. ANS: T REF: p. ANS: F Currently. because of the lower tax rates applied to capital gains. PTS: 1 REF: p. ANS: F The subsidiary corporation may. 20-13 | Concept Summary 20-1 16.

PTS: 1 REF: Concept Summary 20-2 25. 20-18 . PTS: 1 REF: p. PTS: 1 REF: p. Shareholders who receive cash distributions as a part of a corporate reorganization treat the amount received as a dividend and/or capital gain from the sale of their stock.20-4 2008 Comprehensive Volume/Test Bank 22. 20-18 26. ANS: T See column 2 of Concept Summary 20-2. the courts were determined that businesses should be able to make capital adjustments without being subject to taxation. 20-15 23. PTS: 1 REF: p. If requirements of § 302(b) are met. PTS: 1 REF: p. The amount of recognized gain cannot exceed the amount of realized gain. the like-kind exchange provisions do not cover exchanges of stock. ANS: F The percentage reduction compares the actual shares received in the acquiring corporation to what would have been received if solely acquiring stock had been received. ANS: T The gain recognized due to a cash distribution is considered a dividend to the extent of the shareholder’s proportionate share of corporate E & P. While Congress originally wanted even minor changes in corporate structure to be taxable. 20-18 27. A corporate reorganization in the form of an exchange of stock does not qualify as a like-kind exchange. Shareholders recognize gains and losses if they receive assets other than stock (boot). 20-16 24. Determining whether a shareholder’s gain on a corporate reorganization can qualify for stock redemption treatment is based on the reduction in the percentage of the stock held in the target corporation when compared to the percentage held in the acquiring corporation. PTS: 1 REF: p. ANS: F Gains may be recognized but never losses. the shareholder may receive sale or exchange treatment resulting in capital gain. The remaining gain is generally capital. ANS: T While the results are treated similarly to a like-kind exchange. ANS: F It is the courts that originally considered even minor changes in a corporation’s structure as taxable events and Congress determined that businesses should be allowed to make capital changes without being taxed.

which of the following statements is incorrect? a. Section 267 disallows recognition of losses between related parties in a complete liquidation but not in a qualifying stock redemption. b. fair market value of $60. PTS: 1 REF: p. 20-19 | Concept Summary 20-2 MULTIPLE CHOICE 1. Woodpecker Corporation distributes the following assets to its unrelated shareholders: land held as an investment (basis of $200. inventory (basis of $160. fair market value of $190. Woodpecker Corporation would recognize no gain or loss on the liquidation. d.000 and a loss of $0.000. Both a qualifying stock redemption and a distribution pursuant to a complete liquidation produce sale or exchange treatment to the shareholder. b. d.000 and a loss of $40.000 and a loss of $0. fair market value of $310.000. ANS: E Section 267 disallows losses in a nonliquidating distribution. but not in a complete liquidation. Liquidations and qualifying stock redemptions parallel each other in terms of the effect that E & P has on the nature of the gain or loss recognized by the shareholder.000).) a. In comparing a qualifying stock redemption with a complete liquidation. Woodpecker Corporation would recognize a gain of $140. 20-19 29. 20-4 . A corporation will recognize gain upon the distribution of appreciated property for both a qualifying stock redemption and a complete liquidation. c. Pursuant to a complete liquidation. but a corporation will recognize loss upon a distribution of depreciated property only for a complete liquidation. ANS: T REF: p. The basis in the acquiring stock received by the target shareholders is the vehicle for ensuring that any postponed gain is recognized when the stock is sold at a later date. 20-4 2. e.000. PTS: 1 REF: p. Debt security holders receive similar treatment to shareholders in a corporate reorganization. including a qualified stock redemption. What are the tax results to Woodpecker Corporation as a result of the liquidation? (Woodpecker Corporation has held the land and securities for six years. None of the above.000).Corporations: Complete Liquidation and Reorganizations 20-5 28. and marketable securities (basis of $100. c. e. ANS: D A corporation generally recognizes both gains and losses on liquidating distributions. The basis of property acquired is its fair market value on the date of distribution for both a qualifying stock redemption and a liquidation. Woodpecker Corporation would recognize a gain of $110. as long as the face value of the debt relinquished is equal to the debt received. 20-3 | p. ANS: T REF: p.000.000). Woodpecker Corporation would recognize a gain of $140.

000. and Nina. None of the above. b. the related-party loss limitation applies to disallow the entire loss. Lark Corporation distributes land that it purchased in 2005 for $200. a tract of land (basis of $350. as tenants in common. e. $150.20-6 3. b.000 loss.000. Olaf sells the land for $170.000 gain. Oriole recognizes a gain of $220. The three sisters owned. c. now worth $300.000. d. $0. b. When property distributed in a complete liquidation is subject to a liability of the liquidating corporation. 20-5 | Example 5 .000.000.000 gain. equally to Carol. $50.000) that they transferred to White Corporation four years ago as a contribution to capital. the land is disqualified property. In the current year. The stock in Lark Corporation is owned equally by Olaf and his grandson Pete.000. and Nina as tenants in common. $50.000. As a result. $0. What amount of loss may White Corporation recognize on the distribution of the land? a. $160. the fair market value of the property cannot be less than the amount of the liability.000 gain. own the stock in White Corporation equally.000 and a fair market value of $550. $220.000.000. Thus. White Corporation adopts a plan of liquidation and distributes the land. None of the above. Since White acquired the land within the five-year period preceding the distribution as a contribution to capital. $110. Lori. PTS: 1 REF: Example 3 4. d. 20-4 | p. 2008 Comprehensive Volume/Test Bank Pursuant to a complete liquidation. Carol. $30. e. d. Oriole Corporation distributes to its shareholders land with a basis of $400. e. c. PTS: 1 REF: p. None of the above. Lori.000. ANS: A Each sister owns directly and indirectly 100% of the White Corporation stock under § 267. What loss will Lark Corporation recognize with respect to the land? a. $70. ANS: D Section 336 provides that a liquidating corporation recognizes gain or loss on the distribution of property in complete liquidation. What is Oriole’s recognized gain or loss on the distribution? a. ANS: A Olaf is deemed to own all of the stock of Lark Corporation under the § 267 attribution rules and the distribution of the land is not pro rata. One year later. fair market value of $460.000 (land basis)]. the related-party loss limitation disallows the entire loss. $20. $70. PTS: 1 REF: Example 7 | Footnote 4 5. Thus. c. The property has a fair market value on the date of distribution of $150.000 (liability) – $400.000 to Olaf.000.000 [$620. In a liquidation of the corporation in the current year.000. The land is subject to a liability of $620. Three sisters.

000 of the loss. Purple never used the land for any business purpose during the time it was owned by the corporation. c. The basis of the property to Magenta Corporation is $450.000.000). c. Formed in 1998.000.000).) PTS: 1 REF: Example 11 . b. as there was no net builtin loss on the two properties transferred by Joshua.000 loss realized during the period Purple held the property is recognized. What amount of loss may Magenta Corporation recognize on the sale of the land? a.000. Mark and Megan. Purple Corporation adopts a plan of liquidation in 2007.000 and was sold for this amount. Magenta Corporation would recognize the $60. d. On this date the land has decreased in value to $390. $25. (Note that the § 362(e)(2) basis adjustment rules for loss properties acquired in carryover basis transactions does not apply to the undeveloped land.000. the built-in loss limitation disallows $50. upon a sale of the property for $390. The property does not have a built-in loss on the date of the transfer to the corporation. who are father and daughter.000. Purple Corporation has two equal shareholders. Since the land was acquired within two years of the plan of liquidation. ANS: B The related-party loss limitation does not apply to sales. Magenta Corporation has two equal shareholders. $60. fair market value of $100. What amount of loss can Purple Corporation recognize on the sale of the undeveloped land? a. b. e. PTS: 1 REF: p.000.000) and securities (basis of $25.000 and a fair market value of $520.000 [$100. None of the above. None of the above.000 on the date of the transfer.000 (basis)] on the date it was acquired in the § 351 exchange. while Ellie transferred equipment (basis of $120. The only loss realized upon disposition of the properties was with respect to the undeveloped land that had decreased in value to $50.000.000 and.000. ANS: C The undeveloped land had a built-in loss of $50. sells all of its assets. a tax avoidance purpose is assumed. Magenta Corporation sells the land for $390. and distributes the proceeds pro rata to Joshua and Ellie. fair market value of $100. $100. $50. $0. thus.000. The land had a basis of $450.000 (fair market value) – $150. The related-party loss limitation does not apply to sales. who are father and daughter. the built-in loss limitation does not apply. Joshua transferred undeveloped land (basis of $150. therefore. e.Corporations: Complete Liquidation and Reorganizations 6.000 loss. Since there was no business purpose for transferring the property to Purple.000. the two shareholders transfer properties to Purple in a § 351 exchange. $0. d. fair market value of $200.000. Magenta Corporation adopts a plan of liquidation in the current year. $130. $70. 20-7 Magenta Corporation acquired land in a § 351 exchange in 2006. Section § 362(e)(2) is discussed in Chapter 4.000 and distributes the proceeds pro rata to Mark and Megan. 20-5 to 20-7 7. Joshua and Ellie. In 2006. the remaining $50.

fair market value of $90. How much loss can Crow Corporation recognize on the distribution of the land? a. Kena. $127.000 (land basis)] is allowed. Warbler had purchased the land three years ago for $105.000. Section § 362(e)(2) is discussed in Chapter 4.000.000 to the contributing shareholder and a fair market value of $170. Thus. The land had a basis of $200.000 [$130. e. $70. e.000.000) in the same § 351 exchange. Assume that the shareholder also transferred equipment (basis of $60. PTS: 1 REF: p. Warbler Corporation distributes all of its property in a complete liquidation. d. 2007. None of the above. $120.000 on the date of the distribution to Ali. 2007. c. Crow Corporation acquired the land to use as security for a loan it had hoped to obtain from a local bank.000 basis in her Warbler stock.20-8 8.000 cash and land having a fair market value of $120. ANS: C Crow Corporation had a business reason for acquiring the land. a shareholder who owns 20% of the stock in Crow Corporation.000. b. the bank required the additional capital investment as a condition of its making a loan to Crow Corporation.000 (fair market value) – $200. receives $7. What is Kena’s basis in the land received in the liquidation of Warbler? a.000. $30. In negotiating with the bank for a loan.000. Further. None of the above.000.) PTS: 1 REF: Example 12 9. a shareholder.000. $105. the land was not distributed to a related party. $0. (Note that the § 362(e)(2) basis adjustment rules for loss properties acquired in carryover basis transactions does not apply to the land. ANS: C The basis of property received in a complete liquidation is the property’s fair market value on the date of distribution. 2006. b. Crow Corporation acquired land in a transaction that qualified under § 351. d. 20-9 . as there was no net built-in loss on the two properties transferred by shareholder. Crow Corporation distributes the land to Ali. Value of the land has declined to $130. Kena has a $22.000. c.000. the loss limitation provisions do not apply and the entire loss of $70. On December 4. Crow Corporation adopted a plan of liquidation on October 3. $0. 2008 Comprehensive Volume/Test Bank On April 12. $130.

000 (total distribution) × $105. to its shareholder.000 as to Skylark Corporation. If Maria wishes to defer as much gain as possible on the transaction. Condor Corporation distributes the cash and notes to Maria.000 (amount of cash) ÷ $700.000 (basis $325. The notes are payable over the next five years ($100. $80.000 on the date of liquidation. Condor Corporation sells its only asset. Condor Corporation will recognize a gain on the distribution equal to the excess of the installment notes’ fair market value and the basis Condor had in the notes.000 [$200. e.000 as to Skylark Corporation. $0 as to both Skylark Corporation and Quail Corporation. b.000. to Eduardo (an unrelated party) for $700. Maria recognizes a gain of $595.000. and $75. Quail distributed all its property on December 1. c.000 in the year of liquidation. PTS: 1 REF: p. 2007. Using the relative fair market value approach.000 and Eduardo’s notes for the balance of $500. which of the following is correct? a. None of the above.000 in the Condor stock. having purchased the stock 5 years ago for $310. b. $65. Condor Corporation receives cash of $200. the sole shareholder of Condor Corporation.Corporations: Complete Liquidation and Reorganizations 20-9 10.000 (stock basis)]. Pursuant to the liquidation. ANS: A A combination of §§ 332 and 337 protects both Skylark Corporation and Quail Corporation from the recognition of any gain. Maria must recognize $170.000 as to Quail Corporation. Skylark Corporation owned 100% of the outstanding stock of Quail Corporation. Immediately after the sale. Maria will report 85% of each note collected as capital gain [$425. The installment notes have a value equal to their face amount. Condor Corporation recognizes no gain or loss on the distribution of the installment notes.000 in the year of liquidation. After a plan of complete liquidation has been adopted. 20-10 | p. The interest element will be accounted for separately. Maria recognizes a gain of $95. PTS: 1 REF: Example 14 11.000 (FMV of notes) ÷ $700.000 (basis allocated to the cash)] in the year of liquidation. Pursuant to a plan of liquidation adopted by Quail Corporation on March 1. Maria will allocate her basis in the Condor stock between the cash and the installment notes. Quail distributes property worth $390.000 in the year of liquidation. the stock basis is allocated $30. $15.000 (total distribution) × $105. d.000) to Skylark Corporation.000. None of the above. 2007.000 to the notes [$500. land (basis of $300. Maria has a basis of $105. ANS: C Maria may defer gain on the receipt of the notes to the point of collection.000 (cash received) – $30.000).000 (gross profit) ÷ $500.000 (stock basis)]. d. e. 20-11 .000 per year) and carry an adequate interest rate. How much gain must the parties recognize in 2007 on the transfer of this property to Skylark Corporation? a. Under the terms of the sale. Maria recognizes a gain of $170.000 to the cash [$200. c.000 (contract price)]. Quail Corporation had never been insolvent and had E & P of $420.

c. $0.000. What basis will Indigo Corporation have in the assets acquired from Brown Corporation? a. or $625. e. a subsidiary in which it owns 90% of all classes of stock. Cardinal Corporation is liquidated on October 18. if any.000 in the stock of Brown Corporation. $50. $800. Cardinal Corporation recognizes a gain of $50. Indigo. Neither Finch nor Penguin recognize gain. Cardinal does not recognize any gain on the distribution. PTS: 1 REF: Example 15 13. ANS: B The liquidating distribution of Asset A to Blue Jay is pursuant to a § 332 parent-subsidiary liquidation.000. The stock of Cardinal Corporation is held as follows: 85% by Blue Jay Corporation and 15% by Samuel. b.000 (basis in bonds)].000 and Penguin recognizes a gain of $5.000. None of the above. at a discount. d. c. d.000) to Blue Jay. gains (but not losses) are recognized. fair market value $150. ANS: C Penguin recognizes a gain of $5. Penguin Corporation purchased bonds (basis of $95. $200.000. Indigo Corporation liquidates Brown Corporation and acquires assets worth $800. None of the above. The parent’s basis in the stock of the liquidated subsidiary disappears. Finch recognizes no gain (or loss) on distributions pursuant to a § 332 liquidation. $550.000) of its 100% owned subsidiary. pursuant to a § 332 parent-subsidiary liquidation. Which of the following statements is correct with respect to the distribution of land? a. Finch recognizes a gain of $15.000) to Penguin.000. will Cardinal Corporation recognize on the liquidating distributions? a. PTS: 1 REF: Example 18 . Finch recognizes a gain of $15.000 and with a tax basis to Brown Corporation of $625.000 (fair market value) – $100. Finch distributes land worth $100. Indigo purchased the stock in Brown Corporation 10 years ago. Therefore. $250. and Asset B (basis of $100. None of the above. How much gain. has a basis of $550. 2007. even if property is transferred in satisfaction of indebtedness to Penguin. In distributions from a subsidiary corporation to a minority shareholder. thus.000.000 (value of land) – $95. 2007.000 [$100.000.20-10 2008 Comprehensive Volume/Test Bank 12. c. $0. e. Pursuant to the liquidation. Finch Corporation. Pursuant to a § 332 liquidation and in satisfaction of the indebtedness.000 (basis of $85. ANS: B Property received by a parent corporation in a complete liquidation of its subsidiary under § 332 has the same basis it had in the hands of the subsidiary. b. pursuant to a plan adopted on January 9. Cardinal Corporation distributed Asset A (basis of $650.000. $625.000.000 [$150.000 (basis)] on the distribution of Asset B to Samuel.000 and Penguin recognizes no gain. e.000) to Samuel. fair market value of $850. Finch recognizes no gain and Penguin recognizes a gain of $5. b.000. the parent corporation. d.000.000. PTS: 1 REF: Example 16 | Example 17 14. In the current year.

e. Subsidiary stock acquired by the parent corporation in a tax-free reorganization will count towards the 80% qualified stock purchase requirement. Pelican Corporation has a basis of $500. 20-13 | Concept Summary 20-1 . b. Which of the following statements is incorrect with respect to the § 338 election? a. ANS: C The parent corporation makes the § 338 election.000. PTS: 1 REF: Example 19 16. at least 80% of the stock (voting power and value) of another corporation within an 18month period. but need not. A § 338 election can result in a stepped-up or stepped-down basis for the subsidiary’s assets. d. None of the above. but the assets currently have a fair market value of $800.000.000 in its assets. The subsidiary may. None of the above. During the current year. ANS: C The deemed sale that results from a § 338 election can result in recognized gain or loss for the subsidiary (Dove). e. 20-13 | Concept Summary 20-1 17. The parent corporation makes the § 338 election. e. the stock must be acquired in a taxable transaction and within a 12-month period. $500. Dove need not be liquidated as a result of the § 338 election. but need not. d. To count towards the 80% qualified stock purchase requirement. be liquidated. None of the above. The subsidiary corporation must be liquidated pursuant to the § 338 election. or $500. Dove is treated as a new corporation as of the day following the qualified stock purchase date. A qualified stock purchase occurs when a corporation acquires. Dove may. c. Which of the following statements is correct with respect to the § 338 election? a. what basis will Loon have in the assets it acquires from Pelican Corporation? a. Three years ago. ANS: B Property received by a parent corporation in a complete liquidation of its subsidiary under § 332 has the same basis the property had in the hands of the subsidiary. $0. Dove is treated as a new corporation as of the day following the qualified stock purchase date. $800. The parent’s basis in the stock of the liquidated subsidiary disappears. $720. If Loon liquidates Pelican. PTS: 1 REF: p.000. A § 338 election can result in a stepped-down basis in the subsidiary’s assets. Loon Corporation purchased 100% of the stock of Pelican Corporation for $720. d. b.000. c. Dove can recognize gain but not loss as a result of the § 338 election. c. in a taxable transaction.Corporations: Complete Liquidation and Reorganizations 20-11 15. Goldfinch Corporation purchased 100% of the stock of Dove Corporation and made a qualified election under § 338.000. be liquidated. b. PTS: 1 REF: p.000.

d. PTS: 1 REF: p.” c. PTS: 1 REF: p. All of the following statements are true about gains recognized in a corporate reorganization except: a. There has been an increase in mergers and acquisitions in recent years due to simplifications in the Code that make it easier to qualify for tax-free treatment. All of the above are true. Which of the following is not a reorganization designated under § 368(a)(1)? a. Capital gains and dividend income can be totally eliminated in a corporate reorganization with careful tax planning. Taxable amounts in a reorganization are classified as a dividend or capital gain. The tax law has not simplified corporate reorganization rules in recent years. is a “Type G. Mergers and acquisitions have increased in recent years due to a downturn in the economy and financial statement misstatements. 20-15 19.” d. b. All of the above are reorganizations listed in § 368(a)(1). c. is a “Type B. Recapitalization. Answer c. b. is true of M & A not bankruptcies. c. b. e. 20-15 20. Which of the following is true regarding the current trends in M & A? a. Bankruptcy filings increased in 2005 and 2006 to an all-time high of $1 trillion. ANS: B Corporations prefer dividend treatment because of the dividends received deduction. Individuals are taxed at the same rate for dividends and capital gains. is true of bankruptcies not M & A. is a divisive “Type D. ANS: B Answer a. 20-16 | 20-17 . c. d. e.” b. Transfers due to a bankruptcy or receivership proceeding.20-12 2008 Comprehensive Volume/Test Bank 18. e. Transferring assets to a controlled corporation in exchange for stock that is given to the distributing corporation’s shareholders.” PTS: 1 REF: p. Mergers and acquisitions (M & A) are popular methods of increasing the economic vitality of businesses. 20-14 | p. All of the above statements are true. The current trend is toward friendly mergers and acquisitions. Acquisition of target stock by exchanging voting stock of the acquiring corporation. ANS: E Answer a. d. is a “Type E. Corporate shareholders would prefer taxable amounts in a reorganization be classified as a capital gain.

000. b.000 accumulated earnings and profits prior to the reorganization.000 long-term capital loss. b. Alluvia reports a $20. Carlos purchased 20% of Target Corporation’s stock five years ago for $50. As a dividend of $40. d. e.000 shares and distributes to her 1. e.000). Not enough information is available to determine proper treatment. Target had $300. 20-19 | Example 23 23.000.000 capital gain. As a sale of stock and recognizes a $50.Corporations: Complete Liquidation and Reorganizations 21. Alluvia reports a $20.000 recognized capital gain. c. 20-18 | p. PTS: 1 REF: p.000 × 30% = $30.000 and Gold’s are $50. No gain is recognized by Alluvia in this reorganization. None of the above.000 shares of Gold Corporation stock plus $20. 20-18 20-13 22. 20-18 . which is less than 80% of the stock he would have owned (6% ÷ 10% is less than 80%). c.000 ($100. he would have received 10% of Acquiring. shareholders cannot recognize a loss if the transaction qualifies as a redemption. At the time Silver is acquired by Gold. Alluvia’s basis in her 30% interest in Silver is $80. As a stock redemption and recognizes a $40. Silver Corporation redeems all of Alluvia’s 3.000 cash. How does Carlos treat the exchange for tax purposes? a. Alluvia reports a $15. and he owns less than 50% of Acquiring.000 long-term capital gain.000. Carlos received $40. In a transaction qualifying as a “Type A” reorganization. PTS: 1 REF: p.000.000 cash and 6% of Acquiring Corporation’s stock (valued at $60. Her proportionate share of Silver Corporation’s accumulated earnings and profits is in excess of $20. As a sale of stock and recognizes a $10. No gain or loss is recognized when the shareholder does not receive boot in the transaction. Since Carlos owns 6% of Acquiring. Therefore. How does Alluvia treat this transaction for tax purposes? a.000 ($120.000) in exchange for his Target stock. dividend treatment to the extent of the shareholder’s proportionate share of corporate E & P.000. d.000 recognized dividend and a $5. Which of the following is not a possible outcome for a shareholder who is a party to a corporate reorganization falling under § 368? a.000 and the stock’s market value is $120. e.000 recognized dividend.000) and a recognized dividend of $20. ANS: D If Carlos had received only stock. ANS: B Alluvia has a realized gain of $40.000 – $80. d. If boot is received.000 long-term capital gain. he meets the § 302(b)(2) qualifications for redemption treatment. c. If boot is received. All of the above are possible outcomes. b. ANS: C Losses cannot be recognized by shareholders that are party to a § 368 reorganization. PTS: 1 REF: p. the accumulated earnings and profits of Silver are $100. Redemption treatment and therefore capital gain or loss if the requirements of § 302(b) are met. amounts in excess of a shareholder’s proportionate share of corporate E & P are capital gains.

000 shares of Titian that cost Iris $100.000 – $100. Iris realizes a $20.000 for her 8. losses are not recognized in reorganizations.000 – $30.000 gain.000 ($100. and both bonds mature on the same date. $125. None of the above.000. 20-20 | Example 27 | Concept Summary 20-2 | Concept Summary 20-3 ESSAY 1. Iris recognizes a $20. Raul is happy with the Yellow bond because. Raul recognizes $1. Second.000. This 80% threshold must be met as of the date the plan of liquidation is adopted and until such time all of the subsidiary’s assets are distributed. Iris recognizes a loss of $20.250 gain ($5. How does Iris treat this transaction for tax purposes? a. 20-19 | Example 25 25.000 × 6% = $120.000 shares of Jupiter valued at $50. Her Jupiter stock basis is $50. the parent corporation must own at least 80% of the voting stock of the subsidiary and at least 80% of the value of the subsidiary’s stock. 20-18 to p. Raul currently holds a 15-year $100. 20-10 | p. Yellow Corporation and Green Corporation enter into a “Type A” reorganization. In exchange for his Green bond.000).20-14 2008 Comprehensive Volume/Test Bank 24.000 = $5. ANS: E Iris has a realized loss of $20. even though it pays a lower interest rate. c. ANS: Section 332 will apply to a parent-subsidiary liquidation if the following three requirements are met. Discuss the requirements for a § 332 parent-subsidiary liquidation.000. or $25. In addition to the Jupiter stock. Iris recognizes a loss of $50. Raul recognizes gain of $25.000 on the exchange ($125.000 loss that is not recognized.000 × 5% × 5 years remaining on bond). If the subsidiary is insolvent. the subsidiary must be solvent.000 Green bond paying 6% interest. c. ANS: A Raul recognizes gain to the extent that the principal amounts of the bonds received are in excess of the bonds given up. the parent corporation will have an ordinary loss deduction for its basis in the subsidiary stock. Her basis in her Jupiter stock will be $70. b. Her Jupiter stock basis is $120.000). Her Jupiter stock basis is $105. she receives a $30. Raul receives a 5-year $125.000.000. How does Raul treat this transaction on his tax return? a.000. d. e. None of the above.000 bond received).000.000 five years ago. Raul recognizes a $5.000 × 5%. Iris received 1. e. b.000 gain ($100. Third.000 Yellow bond paying 5% interest.000 – $120.000 loss and a $25. PTS: 1 REF: p. Her Jupiter stock basis is $80.000. d. the subsidiary must distribute all of its assets in complete cancellation of its stock within the taxable year or within three years from the end of the tax year in which the first distribution occurred. the yield provides slightly more interest than the Green bond. however. First. Jupiter Corporation acquires all of Titian Corporation’s stock in exchange for its voting stock. PTS: 1 REF: p. Raul has no gain because he exchanges a security for a security. PTS: 1 REF: p. 20-11 .000 bond.

g. its tax attributes (e. 20-22 . Only the shareholders report the transaction for tax purposes. Describe the requirements for and tax consequences of a § 338 election. 20-13 | Concept Summary 20-1 3.. 20-15 ANS: In order to make an election under § 338. PTS: 1 REF: p. the sale proceeds generally are distributed to the shareholders in liquidation of the corporation. Both the corporation and the shareholders must treat their respective transactions as sales for tax purposes. The subsidiary does not have to be liquidated. and it will obtain a stepped-up (or -down) basis as a result of the deemed repurchase. Since the subsidiary is treated as a new corporation as a result of the election. if the subsidiary is liquidated pursuant to the § 338 election. a corporation must purchase at least 80% of the voting power and at least 80% of the value of the stock in another corporation within a 12-month period (“qualified stock purchase”). The parent corporation must make the irrevocable election by the fifteenth day of the ninth month beginning after the month in which the qualified stock purchase occurs. Upon a qualified § 338 election. but if it is. The subsidiary will recognize gain (or loss) as a result of the deemed sale.Corporations: Complete Liquidation and Reorganizations 2. its tax attributes that would carry over to the parent would be nominal (or zero) in amount. the subsidiary corporation is deemed to have sold all of its assets on the qualified stock purchase date for a value that is determined with reference to the parent’s basis in the subsidiary stock plus the liabilities of the subsidiary. a sale of stock avoids problems that might arise in an asset sale when the purchaser does not want all of the corporation’s assets. The transfer of assets requires that title be changed and that creditors be notified. Compare the sale of a corporation’s assets with a sale of its stock in terms of problems to the seller. The sale of stock poses fewer tax problems. E & P) start anew. The subsidiary is then deemed to be a new corporation that purchased those assets for a similarly computed amount on the day following the qualified stock purchase date. the parent will acquire the subsidiary’s assets with a carryover of the new stepped-up (or -down) basis. Also. ANS: A sale of a corporation’s assets presents more problems than a sale of its stock. When a corporation’s assets are sold. PTS: 1 REF: p. Thus.

there are situations when the corporations or shareholders may recognize gains. REF: p. Shareholders receiving cash or other boot recognize gain.20-16 4. However. 20-19 . ANS: Corporations and shareholders may recognize gains on a restructuring in the following situations. 2008 Comprehensive Volume/Test Bank The general rule for corporate reorganizations is that the corporations involved in a restructuring and their shareholders do not recognize gain or loss on the restructuring. Explain when gain recognition can occur. The amount of gain is the lesser of the gain realized or the boot received. The target corporation distributes its own appreciated property to its shareholders. gain will be recognized. • • • • PTS: 1 The acquiring corporation transfers property to the target corporation along with its stock and securities to the extent that the property has appreciated. The target corporation fails to distribute other property (boot) it receives from the acquiring corporation to its shareholders. 20-18 | p.