Question 1

Specialty Corporation distributes land to one of its shareholders,Sam,as part of a plan of liquidation.The land,which was used in Specialty's business,has an adjusted basis of $50,000 and an FMV of $130,000 on the date of distribution.Sam's basis in Specialty Corporation stock is $100,000.What is the amount and character of the gain/loss recognized by Specialty Corporation? What is the amount and character of the gain/loss recognized by Sam?

Accepted Answer

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Question 2

Cowboy Corporation owns 90% of the single class of stock in Doggie Corporation.The other 10% is owned by Miguel,an individual.Cowboy's basis in its Doggie Corporation stock is $100,000 and Miguel's basis is $50,000.Doggie Corporation distributes property having an adjusted basis of $150,000 and an FMV of $500,000 to Cowboy Corporation,and $60,000 of money to Miguel as a liquidating distribution.Doggie and Cowboy Corporations must recognize gain of:

Accepted Answer

A)The 90% stock ownership by Cowboy meets the Sec.332 minimum stock ownership rules.Therefore,no gain or loss is recognized by the subsidiary corporation or the parent corporation.

Question 3

Distributions to minority shareholders - The liquidating corporation recognizes gain but not loss on liquidating distributions made to minority shareholders when the Sec.332 nonrecognition rules apply to the parent corporation.

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Question 4

What event determines when a cash or accrual method of accounting taxpayer reports a liquidating distribution?

Accepted Answer

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Question 5

Chip and Dale are each 50% owners of Tree Corporation,a holding company.They have each held their stock since the company was formed five years ago.Tree's money is invested almost entirely in stocks,bonds,rental real estate,and land.All of the stocks are traded on the New York Stock Exchange except for 1,000 shares of Conifer Corporation stock.Conifer is privately held by 50 individuals.Last year,Conifer reported about $2 million in net income.During a meeting with Chip and Dale,you discover that they plan to liquidate Tree Corporation as soon as possible to avoid the personal holding company tax.What tax issues should Chip and Dale consider with respect to this liquidation?

Accepted Answer

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Question 6

Parent Corporation for ten years has owned all of the stock of Subsidiary Corporation,which manufactures widgets.Parent's basis in Subsidiary's stock is $500,000.Subsidiary Corporation is insolvent and has no assets to redeem any of the stock that Parent Corporation owns when it liquidates.Nearly all of Subsidiary's gross income during the past five years has come from nonpassive activities.Parent can recognize

Accepted Answer

Since Subsidiary Corporation is insolvent and has no assets to redeem any of the stock, Parent Corporation can recognize a $500,000 ordinary loss. This loss would be treated as an ordinary loss because the stock in Subsidiary Corporation is considered worthless as a result of the insolvency, and the fact that nearly all of Subsidiary's gross income during the past five years has come from nonpassive activities.

Question 7

A subsidiary recognizes no gain or loss on a distribution to a parent corporation owning the majority of the subsidiary's stock in a complete liquidation.

Accepted Answer

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Question 8

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

Accepted Answer

Depreciation recapture income is recognized when an asset is sold for more than its book value, not specifically upon the liquidation of a subsidiary into its parent. Liquidation involves settling debts and distributing assets, which may or may not involve selling assets that could lead to depreciation recapture.

Question 9

When a subsidiary corporation is liquidated into its parent corporation under a formal plan of liquidation,the distributions must take place within

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Question 10

Under Illinois Corporation's plan of liquidation,the corporation distributes land to one of its shareholders,Springer.The land,which is used in Illinois trade or business,has a $20,000 adjusted basis and a $60,000 FMV on the distribution date.What are the tax consequences of this distribution to Illinois and Springer?

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Question 11

Sales having a tax-avoidance purpose - Loss recognition is restricted where property is transferred to the corporation in a Sec.351 transaction or capital contribution after a date two years before the date that the corporation adopts a plan of complete liquidation.Tax avoidance is inferred in these situations unless the corporation uses the property in its trade or business.
A less-often encountered situation involves distributions or sales of a subsidiary corporation's stock.A corporation can elect under Sec.336(e)to treat the sale,exchange,or distribution of a subsidiary's stock as a disposition of all the subsidiary's assets,resulting in no gain or loss being recognized on the sale,exchange,or distribution of the stock.

Accepted Answer

The answer of Sales having a tax-avoidance purpose - Loss...

Question 12

Identify which of the following statements is true.

Accepted Answer

In order for a parent corporation to avoid recognizing a realized gain on the liquidation of a subsidiary corporation, it must own at least 80% of the subsidiary's stock. Option B is incorrect because the liquidation of a subsidiary corporation can be completed over multiple tax years and still receive nonrecognition treatment. Option C is incorrect because the provisions permitting a tax-free liquidation of a subsidiary corporation only apply to corporate shareholders, not noncorporate shareholders. Therefore, option D is also incorrect.

Question 13

Ball Corporation owns 80% of Net Corporation's stock and Jack owns the remaining 20% of Net Corporation's stock.Ball's basis in the Net stock is $200,000 and Jack's basis in the Net stock is $100,000.Under a plan of complete liquidation,Ball Corporation receives property with an adjusted basis of $400,000 and an FMV of $800,000 and Jack receives property with an adjusted basis of $50,000 and an FMV of $200,000.Ball and Jack's recognized gains on the liquidation are:

Accepted Answer

To determine the recognized gain, we need to compare the FMV of the property received to the basis of the stock surrendered.

For Ball Corporation: 
FMV of property received = $800,000 
Basis of Net Corporation stock surrendered = $200,000

Therefore, Ball has a recognized gain of $600,000 ($800,000 - $200,000).

For Jack: 
FMV of property received = $200,000 
Basis of Net Corporation stock surrendered = $100,000

Therefore, Jack has a recognized gain of $100,000 ($200,000 - $100,000).

The total recognized gain for the liquidation is the sum of Ball and Jack's recognized gains, which is $700,000 ($600,000 + $100,000).

Therefore, the best choice is B.

Question 14

Explain the difference in tax treatment between a partial liquidation and a complete liquidation.

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Question 15

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?

Accepted Answer

C)75% stock ownership by Premier Corporation does not meet the 80% stock ownership minimum of Sec.332 in order for nonrecognition of gain or loss to occur.

Question 16

Liquidation of a subsidiary corporation - The liquidating corporation recognizes no gain or loss on liquidating distributions made to a parent corporation that owns at least 80% of the subsidiary's stock.

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Question 17

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

Accepted Answer

A)100% ownership by Parent Corporation of Subsidiary's single class of stock meets the 80% minimum stock ownership requirement of Sec.332 for nonrecognition of gain or loss.

Question 18

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

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Question 19

Distributions to related persons - Loss recognition is disallowed when the liquidating corporation makes a distribution to a related person,as defined in Sec.267(b),if (1)the distribution is not pro rata or (2)the property distributed is disqualified property.Disqualified property is property acquired by the corporation in a Sec.351 tax-free formation or as a capital contribution during the five-year period ending on the distribution date or property having an adjusted basis that carries over from a disqualified property.

Accepted Answer

The answer of Distributions to related persons - Loss recognition...

Question 20

The liquidation of a subsidiary corporation must be completed within one tax year to receive nonrecognition treatment.

Accepted Answer

The liquidation of a subsidiary does not need to be completed within one tax year to receive nonrecognition treatment under certain sections of the Internal Revenue Code, such as Section 332, which allows for a tax-free liquidation of a subsidiary if certain conditions are met, without specifying a one-year completion requirement.

Quiz 6: Corporate Liquidating Distributions