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Exam 6: Corporations: Redemptions and Liquidations

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Question 51

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After a plan of complete liquidation has been adopted,Condor Corporation sells its only asset,land (basis of $220,000) ,to Eduardo (an unrelated party) for $300,000.Under the terms of the sale,Condor Corporation receives cash of $50,000 and Eduardo's notes for the balance of $250,000.The notes are payable over the next five years ($50,000 per year) and carry an appropriate interest rate.Immediately after the sale,Condor Corporation distributes the cash and notes to Maria,the sole shareholder of Condor Corporation.Maria has a basis of $30,000 in the Condor stock.The installment notes have a value equal to their face amount.If Maria wishes to defer as much gain as possible on the transaction,which of the following is correct?

A) Condor Corporation recognizes no gain or loss on the distribution of the installment notes.
B) Maria recognizes a gain of $20,000 in the year of liquidation.
C) Maria recognizes a gain of $45,000 in the year of liquidation.
D) Maria recognizes a gain of $270,000 in the year of liquidation.
E) None of the above.

F) C) and E)
G) B) and D)

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Question 52

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Pursuant to a complete liquidation,Lilac Corporation distributes the following assets to its unrelated shareholders: land held for three years as an investment (basis of $300,000,fair market value of $600,000) ,inventory (basis of $100,000,fair market value of $80,000) ,and marketable securities held for four years as an investment (basis of $200,000,fair market value of $240,000) .What are the tax consequences to Lilac Corporation as a result of the liquidation?

A) Lilac Corporation would recognize no gain or loss on the liquidation.
B) Lilac Corporation would recognize a net capital gain of $320,000.
C) Lilac Corporation would recognize a net capital gain of $340,000 and an ordinary loss of $20,000.
D) Lilac Corporation would recognize a net capital gain of $340,000.
E) None of the above.

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

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Question 53

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The gross estate of John,decedent,includes stock in Crimson Corporation and Jade Corporation valued at $1.3 million and $2 million,respectively.John's adjusted gross estate is $9 million.He owned 23% of the Crimson stock and 31% of the Jade stock.Immediate members of John's family own the remaining shares of both Crimson and Jade.Those individuals are also the sole beneficiaries of John's estate.Death taxes and funeral and administration expenses for John's estate are $1.3 million.John had a basis of $475,000 in the Crimson stock and $510,000 in the Jade stock.Crimson Corporation (E & P of $3 million) distributed land worth $1.3 million (basis of $800,000) to John's estate in redemption of all of the Crimson stock.Which of the following is a correct statement regarding the tax consequences of this redemption?

In determining whether a distribution qualifies as a § 303 redemption to pay death taxes,the stock attribution rules must be applied.

Pursuant to a liquidation,Coral Corporation distributes to Lucinda,a shareholder,land (basis of $90,000,fair market value of $200,000).The land is subject to a $75,000 liability.Lucinda will have a basis of $125,000 in the land.

Penguin Corporation purchased bonds (basis of $190,000) 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 $200,000 (basis of $160,000) to Penguin.Which of the following statements is correct with respect to the distribution of land?

On April 7,2011,Crow Corporation acquired land in a transaction that qualified under § 351.The land had a basis of $400,000 to the contributing shareholder and a fair market value of $310,000.Assume that the shareholder also transferred equipment (basis of $100,000,fair market value of $200,000) in the same § 351 exchange.Crow Corporation adopted a plan of liquidation on October 5,2012.On December 7,2012,Crow Corporation distributes the land to Ali,a shareholder who owns 20% of the stock in Crow Corporation.The land's fair market value was $230,000 on the date of the distribution to Ali.Crow Corporation acquired the land to use as security for a loan it had hoped to obtain from a local bank.In negotiating with the bank for a loan,the bank required the additional capital investment as a condition of its making a loan to Crow Corporation.How much loss can Crow Corporation recognize on the distribution of the land?

The built-in loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property's fair market value after its transfer to the corporation.

Grackle Corporation (E & P of $600,000)distributes cash of $200,000 and land (fair market value of $400,000;basis of $250,000)to a shareholder in a qualifying stock redemption.The land distributed is subject to a mortgage of $460,000.Grackle will recognize a gain of $150,000 as a result of the distribution.

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.

Canary Corporation has 1,000 shares of stock outstanding.It redeems in a qualifying stock redemption 350 shares for $400,000 at a time when it has paid-in capital of $100,000 and E & P of $1 million.What would be the charge to Canary's E & P as a result of the redemption?

If a liquidation qualifies under § 332,any minority shareholder will recognize gain or loss equal to the difference between the fair market value of assets received and the basis of the shareholder's stock.

At the time of her death,Janice owned (in terms of the value of the stock outstanding)the following stock: 18% of Heron Corporation and 21% of Hawk Corporation.The value of these stocks is included in Janice's gross estate.For purposes of applying the 35% of the value of adjusted gross estate requirement under § 303 (i.e. ,redemption to pay death taxes),the Heron and Hawk stocks are aggregated.

Magenta Corporation acquired land in a § 351 exchange one year ago.The land had a basis of $320,000 and a fair market value of $350,000 on the date of the transfer.Magenta Corporation has two shareholders,Mark (70%) and Megan (30%) ,who are brother and sister.Magenta Corporation adopts a plan of liquidation in the current year.On this date,the land has decreased in value to $250,000.Magenta Corporation sells the land for $250,000 and distributes the proceeds pro rata to Mark and Megan.What amount of loss may Magenta Corporation recognize on the sale of the land?

If a parent corporation makes a § 338 election,the subsidiary corporation must be liquidated.

Which of the following statements is correct with respect to a partial liquidation?

Finch Corporation distributes property (basis of $225,000,fair market value of $300,000) to a shareholder in a distribution that is a qualifying stock redemption.The property is subject to a liability of $160,000,which the shareholder assumes.The basis of the property to the shareholder is:

Joe owns 100% of Green Corporation (E & P of $500,000) and 100% of Navy Corporation (E & P of $400,000) .Joe sells 100 shares in Green (basis of $40,000) to Navy for $70,000,its fair market value.Joe purchased the stock in Green six years ago.Joe has:

As a result of a redemption,a shareholder's interest (direct and indirect)in the corporation decreased from 58% to 45%.The redemption qualifies for sale or exchange treatment as a disproportionate redemption.

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?