Chapter 20 Corporations: Distributions In Complete Liquidation And An Overview Of Reorganizations

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Problems
23. LO.1, 4 Dove Corporation (E & P of $800,000) has 1,000 shares of stock outstanding.
The shares are owned as follows: Julia, 600 shares; Maxine (Julia’s sister), 300 shares; and Janine (Julia’s daughter), 100 shares. Dove Corporation owns land (basis of $300,000, fair market value of $260,000) that it purchased as an investment seven years ago. Dove distributes the land to Julia in exchange for all of her shares in the corporation. Julia had a basis of $275,000 in the shares. What are the tax consequences for both Dove Corporation and Julia if the distribution is:
a. A qualifying stock redemption?
b. A liquidating distribution?
24. LO.1 Pursuant to a complete liquidation, Oriole Corporation distributes to its shareholders land held for three years as an investment (adjusted basis of $250,000, fair market value of $490,000). The land is subject to a liability of $520,000.
a. What are the tax consequences to Oriole Corporation on the distribution of the land?
b. If the land is, instead, subject to a liability of $400,000, what are the tax consequences to Oriole on the distribution?
25. LO.1 The stock of Mulberry Corporation is owned by Archana (60%) and Anar (40%), who are mother and daughter. Pursuant to a plan of complete liquidation adopted earlier in the current year, Mulberry distributes land worth $575,000 to
Anar (basis of $100,000 in Mulberry stock). The land was purchased by Mulberry
Corporation three years ago for $650,000, and it is distributed subject to a liability of $425,000. What amount of gain or loss is recognized by Mulberry Corporation and by Anar with respect to the distribution of the land?
26. LO.1 Last year, Lory Corporation, a land development company, acquired land and construction equipment from its sole shareholder in a § 351 transaction. At the time, the land had a basis of $790,000 and a fair market value of $650,000, and the equipment had a basis of $130,000 and a fair market value of $300,000. The assets were transferred to Lory Corporation for the purpose of developing the land and constructing a residential home community. However, the residential housing market suffered a steep decline in the current year, and as a result of financial difficulties,
Lory Corporation was forced to sell its assets and liquidate. Pursuant to a plan of liquidation adopted during the year, Lory sold the land to an unrelated party for its current fair market value of $500,000. What amount of loss, if any, is recognized by Lory Corporation on the sale of the land?
27. LO.1 Last year, a shareholder transferred land (basis of $650,000, fair market value of $575,000) to Roadrunner Corporation in a § 351 transaction. This was the only property transferred to Roadrunner at that time. During the current year, Roadrunner
Corporation adopted a plan of liquidation and distributed the land to
Rhonda, a 15% shareholder. On the date of the distribution, the land had a fair market value of $400,000. Roadrunner Corporation never used the land for business purposes during the time it owned the property. What amount of loss may Roadrunner recognize on the distribution of the land?
28. LO.1, 4 Last year, Pink Corporation acquired land and securities in a § 351 tax-free exchange. On the date of the transfer, the land had a basis of $720,000 and a fair market value of $1 million, and the securities had a basis of $110,000 and a fair market value of $250,000. Pink Corporation has two shareholders, Maria and Paul, who are unrelated. Maria owns 85% of the stock in the corporation, and Paul owns
15%. Pink adopts a plan of liquidation in the current year. On this date, the value of the land has decreased to $500,000. What is the effect of each of the following on
Pink Corporation? Which option should be selected?
a. Distribute all of the land to Maria.
b. Distribute all of the land to Paul.
c. Distribute 85% of the land to Maria and 15% to Paul.
d. Distribute 50% of the land to Maria and 50% to Paul.
e. Sell the land and distribute the proceeds of $500,000 proportionately to Maria and to Paul.
29. LO.1, 4 Assume in Problem 28 that the land had a fair market value of $630,000 on the date of its transfer to the corporation. On the date of the liquidation, the land’s fair market value has decreased to $500,000. How would your answer to
Problem 28 change if:
a. All of the land is distributed to Maria?
b. All of the land is distributed to Paul?
c. The land is distributed 85% to Maria and 15% to Paul?
d. The land is distributed 50% to Maria and 50% to Paul?
e. The land is sold and the proceeds of $500,000 are distributed proportionately to
Maria and to Paul?
30. LO.1 Pursuant to a complete liquidation in the current year, Scarlet Corporation distributes to Jake land (basis of $425,000, fair market value of $390,000) that was purchased three years ago and held as an investment. The land is subject to a liability of $250,000. Jake, who owned 35% of the Scarlet Corporation shares outstanding, had a basis of $60,000 in the stock. What are the tax consequences of the liquidating distribution to Scarlet Corporation and to Jake?
31. LO.2 The stock of Magenta Corporation is owned by Fuchsia Corporation (95%) and Marta (5%). Magenta is liquidated in the current year, pursuant to a plan of liquidation adopted earlier in the year. In the liquidation, Magenta distributes various assets worth $950,000 (basis of $620,000) to Fuchsia (basis of $700,000 in
Magenta stock) and a parcel of land worth $50,000 (basis of $75,000) to Marta (basis of $30,000 in Magenta stock). Assuming that the § 338 election is not made, what are the tax consequences of the liquidation to Magenta, Fuchsia, and Marta?
32. LO.2 The stock in Ivory Corporation is owned by Gold Corporation (80%) and
Imelda (20%). Gold Corporation purchased its shares in Ivory nine years ago at a cost of $650,000, and Imelda purchased her shares in Ivory four years ago at a cost of $175,000. Ivory Corporation has the following assets that are distributed in complete liquidation:
Adjusted Basis Fair Market Value
Cash $600,000 $600,000
Inventory 80,000 200,000
Equipment 350,000 200,000
a. Assume that Ivory Corporation distributes the cash and inventory to Gold Corporation and the equipment to Imelda. What are the tax consequences of the distributions to Ivory Corporation, to Gold Corporation, and to Imelda?
b. Assume that Ivory Corporation distributes the cash and equipment to Gold Corporation and the inventory to Imelda. What are the tax consequences of the distributions to Ivory Corporation, to Gold Corporation, and to Imelda?
33. LO.2 Orange Corporation purchased bonds (basis of $350,000) of its wholly owned subsidiary, Green Corporation, at a discount. Upon liquidation of Green pursuant to § 332, Orange receives payment in the form of land worth $400,000, the face amount of the bonds. Green Corporation had a basis of $320,000 in the land. What are the tax consequences of this land transfer to Green Corporation and to Orange Corporation?
34. LO.2 On July 22, 2015, Lilac Corporation purchased 25% of the Coffee Corporation stock outstanding. Lilac Corporation purchased an additional 40% of the stock in Coffee on March 25, 2016, and an additional 20% on May 2, 2016. On September
23, 2016, Lilac Corporation purchased the remaining 15% of Coffee Corporation stock outstanding. For purposes of the § 338 election, on what date does a qualified stock purchase occur? What is the due date for making the § 338 election?
35. LO.2 On April 29, 2016, Auk Corporation acquires 100% of the outstanding stock of
Amazon Corporation (E & P of $750,000) for $1.2 million. Amazon Corporation has assets with a fair market value of $1.4 million (basis of $800,000), no liabilities, and no loss or tax credit carryovers. Amazon Corporation’s tax rate is 34%. Auk
Corporation files a timely § 338 election. Assume that both the aggregate deemed sale price (ADSP) and adjusted grossed-up basis (AGUB) are $1.4 million.
a. What are the tax consequences of the § 338 election to Amazon Corporation and to Auk Corporation?
b. Assume that Amazon Corporation is liquidated immediately following the § 338 election. What are the tax consequences of the liquidation to Amazon Corporation and to Auk Corporation?
36. LO.3 Quail Corporation was created six years ago through contributions from
Kasha ($900,000) and Frank ($100,000). In a transaction qualifying as a reorganization,
Quail exchanges all of its assets currently valued at $1.8 million (basis of $1.2 million) for 12,000 shares of Covey Corporation stock valued at $1.7 million plus $100,000 in Covey bonds. Quail distributes the Covey stock and bonds proportionately to Frank and Kasha in exchange for their stock in Quail. Quail’s current and accumulated E & P before the reorganization amounts to $70,000.
a. How do Kasha and Frank treat this transaction for income tax purposes? What is Kasha’s and Frank’s basis in their Covey stock?
b. How do Quail and Covey treat this transaction for income tax purposes? What is Covey’s basis in the assets it receives from Quail?
37. LO.3 Jed acquired 25% of the stock of Alpha (basis of $100,000) 12 years ago, and the other 75% was purchased by Zia (basis of $400,000) three years ago.
Alpha enters into a tax-free consolidation with Beta, in which Jed will receive an
8% interest in the new AlphaBeta (value $90,000) plus $36,000 cash and Zia will receive a 28% interest (value $315,000) plus land worth $63,000. Alpha’s basis in the land is $35,000.
Before the reorganization or distributions to its shareholders, Alpha’s value is $504,000 and Beta’s value is $720,000.
a. What is Jed’s and Zia’s recognized gain or loss on the reorganization? What is each shareholder’s basis in his or her AlphaBeta stock?
b. What is Alpha’s and Beta’s recognized gain or loss on the reorganization?
c. Diagram the consolidation of Alpha and Beta Corporation.
38. LO.3 Target Corporation holds assets with a fair market value of $4 million (adjusted basis of $2.2 million) and liabilities of $1.5 million. It transfers assets worth $3.7 million to Acquiring Corporation in a “Type C” reorganization, in exchange for
Acquiring voting stock and the assumption of $1.4 million of Target’s liabilities.
Target retained a building worth $300,000 (adjusted basis of $225,000). Target distributes the Acquiring voting stock and the building with an associated $100,000 mortgage to Wei, its sole shareholder, for all of her stock in Target. Wei’s basis in her stock is $2.1 million.
a. What is the value of the stock transferred from Acquiring to Target?
b. What is the amount of gain (loss) recognized by Wei, Target, and Acquiring on the reorganization?
c. What is Wei’s basis in the stock and building she received?