ACC 757 TAX CH. 6

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

$0 gain

Riverwalk Corporation is​ liquidated, with Juan receiving​ $5,000 in​ money, other property having a​ $6,000 FMV, and a​ $1,000 mortgage on the property.​ Juan's basis in his River walk stock is​ $8,000. Upon​ liquidation, Juan must recognize a gain of

$2,000

Texas Corporation is undergoing a complete liquidation and distributes land to​ Robert, one of its​ shareholders, in exchange for all of​ Robert's stock. The land has a basis of​ $300,000 and an FMV of​ $400,000 on Texas​ Corporation's books and is subject to a​ $325,000 liability. Robert assumes the liability on the property.​ Robert's basis in his Texas Corporation stock is​ $100,000. What is the amount of gain or loss recognized by Robert on the​ distribution?

$25,000 loss

Riverwalk Corporation is​ liquidated, with Juan receiving​ $5,000 in money and other property having a​ $6,000 FMV.​ Juan's basis in his Riverwalk stock is​ $8,000. Upon​ liquidation, Juan must recognize a gain of

$3,000

Explain why a shareholder receiving a liquidating distribution would prefer to receive either capital gain treatment or ordinary loss treatment.

- A shareholder may prefer capital gain treatment to offset capital losses recognized in the same year or an earlier year and which carryover to the liquidation year. Recognition of capital gains on a liquidation can permit the recognition of previously unrealized capital losses and reduce the tax cost of making the liquidation. - Net capital gains recognized by an individual shareholder are taxed at a preferential capital gains rate. - Ordinary loss treatment is preferable to capital loss treatment due to the​ $3,000 loss limitation on capital losses that applies to an individual shareholder. This low limitation does not apply to an ordinary loss. Ordinary losses can carry over as part of the​ shareholder's NOL. ALL OF THE ABOVE

Indicate whether each statement about a liquidation is true or false: TRUE

- Liabilities assumed by a shareholder when a corp liquidates reduce the amount realized by the shareholder on the surrender of his or her stock - a liquidating subsidiary recognizes no gain or loss when it distributes its property to its parent corp - a parent corp's basis for the assets received in a liquidation where gain is not recognized remains the same as it was to the liquidating subsidiary corp.

Explain the following​ statement: A corporation may be liquidated for tax purposes even though dissolution has not occurred under state corporation law.

- Many corporations retain their corporate charters to protect its corporate name from being acquired by another party.​ However, these corporations adopt plans of liquidation. - When a corporation liquidates it does not surrender its corporate charter for state​ purposes, which is required for a full dissolution. Liquidation status continues from the time the plan of liquidation has been formally or informally adopted until the corporation ceases to be a going concern or until it has divested itself of all its property. Dissolution is a legal term that implies the corporation has surrendered the charter it originally received from the state. A corporation generally may complete its liquidation prior to undergoing dissolution. Dissolution may never occur if the corporation retains its charter to protect its corporate name from being acquired by another party.

True

- a. Liabilities assumed by a shareholder when a corporation liquidates reduce the amount realized by the shareholder on the surrender of his or her stock. - g. A liquidating subsidiary recognizes no gain or loss when it distributes its property to its parent corporation. - h. A parent corporation's basis for the assets received in a liquidation where gain is not recognized remains the same as it was to the liquidating subsidiary corporation.

Indicate whether each statement about a liquidation is true or false: FALSE

- false because it generally is a capital loss. the shareholder, however, may recognize an ordinary loss if the corp being liquidated is a small business corp or an insolvent subsidiary corp : the loss recognized by a shareholder on a liquidation generally is characterized as an ordinary loss. - false because it generally is the property's FMV. liquidation under sec 332, however, will result in a carryover basis to the parent - false as it starts on the day following the liquidation date. but, the parent's holding period includes the sub's holding period when the liquidation qualifies under sec 332 - false as the attributes disappear. the tax attributes, however, carryover to a parent corp in connection with a liquidation under sec 332 - false as nonrecognition of gain or loss is mandatory if the sec 332 and 337 requirements are met. gain or loss can be recognized if the sec 332 or sec 337 requirements are not met

Yancy owns 70​% of Andover Corporation stock. At the beginning of the current​year, the corporation has $400,000 of NOLs. Yancy plans to liquidate the corporation and have it distribute assets having a $600,000 FMV and a $350,000 adjusted basis to its shareholders. Explain to Yancy the tax consequences of the liquidation to Andover Corporation.

1. begin by calculate the gain/loss Andover will recognize upon liquidating the company's assets FMV of assets - adjusted basis = 250,000 recognized gain/loss 2. The gain from the preceding step along with any profits earned during the final tax year will be offset by $250,000 of NOL carryover. The remaining NOL carryover disappears when the liquidation is completed. Any profits and losses created in the year of liquidation could be passed through to Yancy and the other shareholders if a valid S corporation election is made.

What is a complete​ liquidation? A partial​ liquidation? Explain the difference in the tax treatment accorded these two different events.

A complete liquidation is defined as one or a series of distributions made by a liquidating corporation that completely cancels or redeems all of its stock in accordance with a plan of liquidation. A partial liquidation is defined as a distribution that​ (1) is not essentially equivalent to a dividend and​ (2) is pursuant to a plan of liquidation and occurs within the tax year in which the plan is adopted or within the succeeding tax year. The complete liquidation is taxed to the extent the shareholder recognizes a gain or loss. A partial liquidation results in exchange treatment for a noncorporate shareholder.

complete liquidation

A complete liquidation is defined by Reg.Sec.1.332- 2(c) as one or a series of distributions made by a liquidating corporation that completely cancels or redeems all of its stock in accordance with a plan of liquidation.

difference between complete / partial liquidation

A complete liquidation is taxed under Secs. 331 and 336. A partial liquidation is taxed under Secs. 302(b)(4) and 311. The complete liquidation is taxed to the extent the shareholder recognizes a gain or loss, which is computed by comparing the FMV of the property received to the adjusted basis of the stock redeemed. When the shareholder receives a series of liquidating distributions, the distribution is taxed once the FMV of the property received exceeds the adjusted basis of the stock held. All basis is recovered first before the shareholder recognizes any gain. A partial liquidation results in exchange treatment for a noncorporate shareholder under Sec. 302(b)(4). A corporate shareholder is eligible for exchange treatment only if the distribution qualifies as an exchange under the stock redemption rules of Secs. 302(b)(1)-(b)(3). The shareholder recognizes a loss only when he or she receives the final liquidating distribution. pp. C:4-23 through C4-25 and C:6-4 through C:6-10.

partial liquidation

A partial liquidation is defined by Sec. 302(e) as a distribution that (1) is not essentially equivalent to a dividend (when determined at the corporate level rather than at the shareholder level) and (2) is pursuant to a plan of liquidation and occurs within the tax year in which the plan is adopted or within the succeeding tax year. Generally, a partial liquidation involves the corporation either ceasing to conduct a trade or business (while still continuing to conduct a second trade or business) or contracting its business activities. In either case, the corporation remains in existence after the partially liquidating distribution.

What is a plan of liquidation? why is it advisable for a corporation to adopt a formal plan of liquidation?

A plan of liquidation is a formal document that details the steps to be taken to carry out the complete liquidation. The plan of liquidation helps the corporation determine when it begins its liquidation process. Once liquidation status is determined, distributions to the shareholders qualify for liquidation treatment under Sec. 331 instead of being treated as dividends under Sec. 301 or as a stock redemption under Sec. 302. p. C:6-21.

Identify which of the following statements is true.

A. A parent corporation cannot liquidate a subsidiary corporation​ (having but a single class of​ stock) and avoid recognizing its realized gain unless the parent corporation owns at least​ 80% of the​ subsidiary's stock. Your answer is correct. B. The provisions permitting a tax−free liquidation of a subsidiary corporation apply to both corporate and noncorporate shareholders of the subsidiary. C. The liquidation of a subsidiary corporation must be completed within one tax year to receive nonrecognition treatment. D. All of the above are false. A.

Parent Corporation owns​ 80% of Subsidiary​ Corporation's stock. Sally owns the remaining​ 20% of the Subsidiary stock. Subsidiary plans to distribute cash and appreciated property pursuant to its liquidation. It has more than enough cash to redeem all of​ Sally's stock. A. What strategy for distributing the cash and appreciated property would minimize the gain recognized by Subsidiary on the​ distribution? B. Does the substitution of appreciated property for cash change the tax consequences of the liquidating distribution for​ Sally?

A. A distribution of appreciated property should be made to the parent corporation so the liquidating corporation does not have to recognize the appreciation as gain. B. - Yes. A carryover basis is used instead of the FMV basis that would be available if the liquidating corporation distributes such property to the minority shareholder. - Yes. The shareholder would recognize gain or loss on the distribution whether the corporation distributes cash or property at FMV

In a complete liquidation of a​ corporation, which of the following is false​?

A. The corporation ceases to be a going concern. B. All stock of the liquidating corporation is canceled or redeemed. C. The corporation divests itself of substantially all its properties. D. The liquidation of a corporation means it has undergone dissolution. D.

Liquidation rules generally are applied the same to the following organizations except for

A. subsidiary corporations​ (80% controlled). B. subsidiary corporations​ (less than​ 80% controlled). C. S corporations. D. C corporations. A.

Explain the congressional intent behind the enactment of the Sec. 332 rules regarding the liquidation of a subsidiary corporation.

Congress enacted the Sec. 332 liquidation rules to permit a nontaxable liquidation of a subsidiary corporation into its parent corporation. These rules allow a corporation to form a subsidiary corporation​ tax-free under Sec.​ 351, operate the subsidiary corporation for a period of​ time, then liquidate the subsidiary corporation​ tax-free back into its parent corporation and continue to operate it as a division within the parent​ corporation's shell.

Gain/loss realized Gain/loss recognized - Same as realized

FMV of property and cash received minus basis of stock. If s/h assumes any liabilities of the company, then amount received is reduced but not below zero.

Nils​ Corporation, a calendar year​ taxpayer, adopts a plan of liquidation on April 1 of the current year. The final liquidating distribution occurs on January 5 of next year. Must Nils Corporation file a tax return for the current​ year? For next​ year?

Nils Corporation must file federal income tax returns for both the current year and next year. Regulation Sec. 1.6012-2(a)(2) requires a corporation that is in existence for any part of a tax year to file a tax return.

Texas Corporation liquidates through a series of distributions to its shareholders after a plan of liquidation has been adopted. How are these distributions​ taxed?

Partial liquidations that result in a complete liquidations follow Sec. 331 in that the​ shareholder's basis is recovered first and gain recognition only occurs after the basis of a particular share or block of shares has been fully recovered. A loss is not recognized by the shareholder until the final liquidating distribution is received and then only after their basis of the shares is recovered.

The adjusted basis of property received in a complete liquidation is its fair market value on the distribution date.

TRUE

Property received in a corporate liquidation by a noncorporate shareholder has

a basis equal to its FMV. Its holding period commences on the day after the distribution date.

for 7 years, monaco corp has been owned entirely by Stacy and Monique, who are husband and wife. s and m have a 165000 basis in their jointly owned monaco stock. the monaco stock is sec 1244 stock. they receive the following assets in liquidation of their corporation: accounts receivable, 25,000 fmv; a car, 16,000 fmv; office furniture, 6,000 fmv; and 5,000 cash.

a. amount and character of their gain or loss?

False

b. insolvent subsidiary corporation.) (I.) c. A shareholder's basis for property received in a liquidation is the same as the property's basis in the liquidating corporation's hands. (III). d. The holding period for property received in a liquidation includes the period of time it is held by the liquidating corporation. (V.) e. The tax attributes of a liquidating corporation are assumed ratably by its shareholders. (VI) f. A parent corporation can elect to recognize gain or loss when it liquidates a controlled subsidiary corporation. (VII)

Under a plan of complete​ liquidation, Key Corporation distributes land​ (not a disqualified​ property) with an adjusted basis of​ $410,000 and an FMV of​ $300,000 for all​ Sharon's stock.​ Sharon's basis in her​ 5% interest in the Key stock is​ $250,000. Find​ Sharon's basis in the land and Key​ Corporation's recognized gain or loss.

basis= 300,000 recognized gain/loss = 110,000

Liquidation and dissolution have the same legal meaning.

false

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

the current and next three tax years.

The general rule for tax attributes of liquidating corporations is

they disappear when the liquidation is complete.

In a complete​ liquidation, a liability assumed by a shareholder reduces the​ shareholder's amount realized.

true

A liquidating corporation could either​ (1) sell its assets and then distribute remaining cash to its shareholders or​ (2) distribute its assets directly to the shareholders who then sell the distributed assets. Do the tax consequences of these alternatives​ differ?

​No, the results are normally the same unless the corporation is subject to loss limitation rules upon the distribution of property to certain shareholders.