Question 1

Brown Corporation purchased 85% of the stock of Green Corporation five years ago for $1.2 million.In the current year,Brown Corporation liquidates Green Corporation and acquires assets with a basis to Green Corporation of $800,000 (fair market value of $1.3 million).Brown Corporation will have a basis in the assets of $1.2 million,the same as Brown's basis in the Green stock.

Accepted Answer

False

Question 2

When planning a corporate reorganization,the tax laws should be considered only after the reorganization has been structured.

Accepted Answer

Tax implications should be considered during the planning stage of a corporate reorganization to ensure that the reorganization is structured in a tax-efficient manner. Waiting until after the reorganization has been structured may result in missed opportunities for tax savings.

Question 3

To ensure the desired tax treatment,parties contemplating a corporate reorganization should apply for a letter ruling from the IRS.

Accepted Answer

A letter ruling from the IRS can provide clarification and assurance regarding the tax treatment of a corporate reorganization, and can help avoid potential tax consequences if the reorganization is structured improperly. However, obtaining a letter ruling can be a lengthy and costly process.

Question 4

When a shareholder receives property subject to a liability pursuant to a complete liquidation (not a parent-subsidiary liquidation),the fair market value of the property is reduced by the amount of the liability in computing the shareholder's gain (or loss)on the liquidation.

Accepted Answer

This is known as the "liabilities assumed" rule, and it is set forth in IRC Section 334(b)(1). The shareholder's basis in the property received is reduced by the amount of the liability, which effectively reduces the amount of gain (or increases the amount of loss) realized on the liquidation.

Question 5

Shareholders may defer gain,to the point of collection,on a liquidating distribution of installment notes obtained by the corporation in the sale of its assets.

Accepted Answer

Shareholders may defer the gain on a liquidating distribution of installment notes obtained by the corporation in the sale of its assets, meaning that they can postpone paying taxes on the distributed gains until the installment payments have been collected.

Question 6

One advantage of acquiring a corporation via a stock purchase instead of an asset purchase is that a stock purchase avoids the transfer of the acquired corporation's liabilities.

Accepted Answer

In a stock purchase, the buyer acquires both the assets and liabilities of the corporation, whereas in an asset purchase, the buyer can choose which assets and liabilities to acquire.

Question 7

If a parent corporation makes a § 338 election,the subsidiary corporation need not be liquidated.

Accepted Answer

When a parent corporation makes a § 338 election, it is treated as if it had purchased the subsidiary corporation's assets and assumed its liabilities, causing a deemed liquidation of the subsidiary corporation. However, the subsidiary corporation need not be actually liquidated or dissolved.

Question 8

For purposes of the built-in loss limitation,the 2-year presumptive rule of tax avoidance can be rebutted if there is a clear and substantial relationship between the contributed property and the corporation's business.

Accepted Answer

The 2-year presumptive rule of tax avoidance can be rebutted if the contributed property has a clear and substantial relationship with the corporation's business, even if it has not been held for 2 years. Therefore, the statement in the question is true.

Question 9

For purposes of the related-party loss limitation,"disqualified property" is defined as property that is acquired by the liquidating corporation in a § 351 or contribution to capital transaction during the two-year period ending on the date of the distribution.

Accepted Answer

The answer of For purposes of the related-party loss limitation,"disqualified...

Question 10

United States tax policy tries to encourage business development.

Accepted Answer

The goal of US tax policy is to encourage economic growth, which includes promoting business development. The government offers various tax incentives, such as deductions and credits, to businesses that invest in research and development, purchase new equipment, and create jobs.

Question 11

Corporate shareholders would prefer to have a gain on a reorganization treated as a dividend rather than as a capital gain,because of the dividends received deduction.

Accepted Answer

This is because the dividends received deduction allows corporate shareholders to reduce their taxable income by a portion of the dividends received from other corporations, effectively lowering their overall tax liability. If the gain on a reorganization is treated as a dividend, it is eligible for this deduction, whereas if it is treated as a capital gain, it is not.

Question 12

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 E & P of $600,000 at the time of liquidation.The subsidiary's E & P disappears as a result of the liquidation.

Accepted Answer

The subsidiary's E & P does not disappear as a result of liquidation. It is deemed to distribute its E & P to the parent before the liquidation. Therefore, the parent will have $600,000 of dividend income and the subsidiary will have a basis of zero in its assets.

Question 13

If a liquidation qualifies under § 332,any minority shareholder will recognize gain (but not loss)equal to the difference between the fair market value of assets received and the basis of the shareholder's stock.

Accepted Answer

If a liquidation qualifies under § 332, all shareholders, including minority shareholders, will receive a complete liquidation payment and are treated as having sold their stock for a total amount of cash and other property received in the liquidation. The gain or loss recognized will equal the difference between the amount received and the shareholder's adjusted basis in the stock.

Question 14

As a general rule,a liquidating corporation recognizes gains and losses on the distribution of property in complete liquidation.

Accepted Answer

This is a general rule under the Internal Revenue Code. However, certain exceptions may apply depending on the circumstances of the liquidating corporation.

Question 15

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

Accepted Answer

The requirement for a sound business purpose is one of the criteria for a corporate restructuring to be considered a tax-free reorganization under the Internal Revenue Code.

Question 16

For purposes of the § 338 election,a corporation must acquire,in a taxable transaction,at least 50% of the stock (voting power and value)of another corporation within an 12-month period.

Accepted Answer

For a § 338 election, a corporation must acquire at least 80% of the stock (voting power and value) of another corporation within a 12-month period in a taxable transaction.

Question 17

Section 332 will apply to a parent-subsidiary liquidation even if the subsidiary corporation is insolvent on the date of the liquidation.

Accepted Answer

Section 332 of the Internal Revenue Code applies to tax-free liquidations of solvent subsidiaries. If the subsidiary is insolvent, the liquidation does not qualify under Section 332.

Question 18

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

Accepted Answer

According to the Internal Revenue Service (IRS), legal dissolution is not required for a liquidation to be complete for tax purposes. The IRS considers a liquidation to be complete when all assets have been sold or distributed and all liabilities have been paid or resolved. However, state law may have different requirements for a complete liquidation.

Question 19

If a parent corporation makes a § 338 election,the subsidiary recognizes gains and losses as result of a deemed sale of its assets.

Accepted Answer

When a parent corporation makes a § 338 election, the subsidiary is treated as if it sold all of its assets to a new corporation, which can result in recognition of gains or losses on those assets.

Question 20

One similarity between the tax treatment accorded nonliquidating and liquidating distributions is with respect to the recognition of losses by the distributing corporation.As a general rule,a corporation recognizes losses on both nonliquidating and liquidating distributions of depreciated property (fair market value less than basis).

Accepted Answer

Corporations generally do not recognize losses on nonliquidating distributions of depreciated property, but they may recognize losses on liquidating distributions.

Quiz 20: Distributions in Complete Liquidation and an Overview of Reorganizations