Research Problems
Research Problem 1. Shelly Zumaya (2220 East Hennepin Avenue, Minneapolis, MN
55413) is the president and sole shareholder of Kiwi Corporation (stock basis of $400,000). Incorporated in 2005, Kiwi Corporation’s sole business has consisted of the purchase and resale of used farming equipment. In December 2014, Kiwi transferred its entire inventory (basis of $1.2 million) to Shelly in a transaction described by the parties as a sale. According to Shelly and collaborated by the minutes of the board of directors, the inventory was sold to her for the sum of $2 million, the fair market value of the inventory. The terms of the sale provided that Shelly would pay
Kiwi Corporation the $2 million at some future date. This debt obligation was not evidenced by a promissory note, and to date, Shelly has made no payments (principal or interest) on the obligation. The inventory transfer was not reported on Kiwi’s
2014 tax return, either as a sale or a distribution. After the transfer of the inventory to
Shelly, Kiwi Corporation had no remaining assets and ceased to conduct any business.
Kiwi did not formally liquidate under state law. Upon an audit of Kiwi Corporation’s
2014 tax return, the IRS asserted that the transfer of inventory constituted a liquidation of Kiwi and, as such, that the corporation recognized a gain on the liquidating distribution in the amount of $800,000 [$2 million (fair market value) – $1.2 million (inventory basis)]. Further, because Kiwi Corporation is devoid of assets, the
IRS assessed the entire tax liability against Shelly, based on transferee liability. Finally, the IRS assessed a tax due from Shelly for her gain recognized in the purported liquidating distribution. Shelly has contacted you regarding the IRS’s determination. Prepare a letter to Shelly Zumaya and a memo for the file, documenting your research.
Research Problem 2. Paloma purchased all of the outstanding Dove stock six years ago. Dove has prospered under Paloma’s direction, and now Hawk Corporation is interested in acquiring Dove, but not directly. Hawk forms a new subsidiary, called
Starling, whose purpose is to merge with Dove. Starling (the target) transfers its asset,
Hawk stock, to Dove (acquiring) in exchange for all of the Dove stock. Dove distributes the Hawk stock to Paloma in exchange for her Dove stock. Starling distributes the Dove stock to its shareholder, Hawk, and then ceases to exist. Dove is now a wholly owned subsidiary of Hawk, and Paloma is a Hawk shareholder.
Hawk immediately liquidates Dove to acquire all of Dove’s assets and liabilities.
Hawk continues Dove’s previous line of business. The end result is that Hawk has all of Dove’s assets and liabilities and that Paloma is a shareholder of Hawk.
Explain whether this reverse triangular restructuring qualifies as a reorganization under § 368 or whether the step transaction doctrine causes it to be disqualified.
Research Problem 3. The requirements for effectively liquidating a corporate entity under state law vary from state to state. Using the Internet as your sole research source, prepare an outline discussing how an entity incorporated in your home state is liquidated, including any reporting requirements associated with such liquidation.
Research Problem 4. While the requirements for a § 332 parent-subsidiary liquidation are fairly straightforward, some planning and reporting issues must be addressed to ensure the proper outcome. Using the Internet as your sole research source, prepare an outline discussing the general requirements for a § 332 parent-subsidiary liquidation, including any associated planning and reporting considerations.
Research Problem 5. Find a current article (not more than two years old) discussing the financial accounting treatment of mergers and acquisitions. The article can discuss current trends in merger and acquisition financial accounting. Provide a written one-page summary of the article to your professor.
Roger CPA Review Questions
1. Katsu Corp. distributes property to its shareholders as part of a complete liquidation.
The fair market value of the property is $500,000, Katsu’s adjusted basis in the property is $150,000, and the property is subject to a liability of $200,000. What amount of gain will Katsu recognize as a result of the transaction?
a. $150,000
b. $550,000
c. $300,000
d. $350,000
Internet
Activity
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
2. Calamity Corp. distributes five unimproved parcels of swampland to its shareholders as part of a complete liquidation. The fair market value of each parcel is $25,000, and Calamity’s adjusted basis in each parcel is $40,000. What amount of gain or loss will Calamity Corp. recognize as a result of distributing the parcels?
a. $15,000 gain
b. No gain or loss will be recognized
c. $75,000 loss
d. $60,000 loss
3. Senior Corp. completely liquidates its 80%-owned subsidiary, Junior Corp. The liquidation results in a distribution to Senior of property with a fair market value of $1,000,000 and an adjusted basis to Junior of $400,000. How much gain will Senior and Junior each recognize on the transaction?
a. Senior, $0; Junior, $600,000
b. Senior, $0; Junior, $0
c. Senior, $600,000; Junior, $0
d. Senior, $0; Junior, $120,000
Research Problem 1. Shelly Zumaya (2220 East Hennepin Avenue, Minneapolis, MN
55413) is the president and sole shareholder of Kiwi Corporation (stock basis of $400,000). Incorporated in 2005, Kiwi Corporation’s sole business has consisted of the purchase and resale of used farming equipment. In December 2014, Kiwi transferred its entire inventory (basis of $1.2 million) to Shelly in a transaction described by the parties as a sale. According to Shelly and collaborated by the minutes of the board of directors, the inventory was sold to her for the sum of $2 million, the fair market value of the inventory. The terms of the sale provided that Shelly would pay
Kiwi Corporation the $2 million at some future date. This debt obligation was not evidenced by a promissory note, and to date, Shelly has made no payments (principal or interest) on the obligation. The inventory transfer was not reported on Kiwi’s
2014 tax return, either as a sale or a distribution. After the transfer of the inventory to
Shelly, Kiwi Corporation had no remaining assets and ceased to conduct any business.
Kiwi did not formally liquidate under state law. Upon an audit of Kiwi Corporation’s
2014 tax return, the IRS asserted that the transfer of inventory constituted a liquidation of Kiwi and, as such, that the corporation recognized a gain on the liquidating distribution in the amount of $800,000 [$2 million (fair market value) – $1.2 million (inventory basis)]. Further, because Kiwi Corporation is devoid of assets, the
IRS assessed the entire tax liability against Shelly, based on transferee liability. Finally, the IRS assessed a tax due from Shelly for her gain recognized in the purported liquidating distribution. Shelly has contacted you regarding the IRS’s determination. Prepare a letter to Shelly Zumaya and a memo for the file, documenting your research.
Research Problem 2. Paloma purchased all of the outstanding Dove stock six years ago. Dove has prospered under Paloma’s direction, and now Hawk Corporation is interested in acquiring Dove, but not directly. Hawk forms a new subsidiary, called
Starling, whose purpose is to merge with Dove. Starling (the target) transfers its asset,
Hawk stock, to Dove (acquiring) in exchange for all of the Dove stock. Dove distributes the Hawk stock to Paloma in exchange for her Dove stock. Starling distributes the Dove stock to its shareholder, Hawk, and then ceases to exist. Dove is now a wholly owned subsidiary of Hawk, and Paloma is a Hawk shareholder.
Hawk immediately liquidates Dove to acquire all of Dove’s assets and liabilities.
Hawk continues Dove’s previous line of business. The end result is that Hawk has all of Dove’s assets and liabilities and that Paloma is a shareholder of Hawk.
Explain whether this reverse triangular restructuring qualifies as a reorganization under § 368 or whether the step transaction doctrine causes it to be disqualified.
Research Problem 3. The requirements for effectively liquidating a corporate entity under state law vary from state to state. Using the Internet as your sole research source, prepare an outline discussing how an entity incorporated in your home state is liquidated, including any reporting requirements associated with such liquidation.
Research Problem 4. While the requirements for a § 332 parent-subsidiary liquidation are fairly straightforward, some planning and reporting issues must be addressed to ensure the proper outcome. Using the Internet as your sole research source, prepare an outline discussing the general requirements for a § 332 parent-subsidiary liquidation, including any associated planning and reporting considerations.
Research Problem 5. Find a current article (not more than two years old) discussing the financial accounting treatment of mergers and acquisitions. The article can discuss current trends in merger and acquisition financial accounting. Provide a written one-page summary of the article to your professor.
Roger CPA Review Questions
1. Katsu Corp. distributes property to its shareholders as part of a complete liquidation.
The fair market value of the property is $500,000, Katsu’s adjusted basis in the property is $150,000, and the property is subject to a liability of $200,000. What amount of gain will Katsu recognize as a result of the transaction?
a. $150,000
b. $550,000
c. $300,000
d. $350,000
Internet
Activity
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
2. Calamity Corp. distributes five unimproved parcels of swampland to its shareholders as part of a complete liquidation. The fair market value of each parcel is $25,000, and Calamity’s adjusted basis in each parcel is $40,000. What amount of gain or loss will Calamity Corp. recognize as a result of distributing the parcels?
a. $15,000 gain
b. No gain or loss will be recognized
c. $75,000 loss
d. $60,000 loss
3. Senior Corp. completely liquidates its 80%-owned subsidiary, Junior Corp. The liquidation results in a distribution to Senior of property with a fair market value of $1,000,000 and an adjusted basis to Junior of $400,000. How much gain will Senior and Junior each recognize on the transaction?
a. Senior, $0; Junior, $600,000
b. Senior, $0; Junior, $0
c. Senior, $600,000; Junior, $0
d. Senior, $0; Junior, $120,000