1. In a complete liquidation a loss may be disallowed or limited in all of the f
ID: 2537784 • Letter: 1
Question
1. In a complete liquidation a loss may be disallowed or limited in all of the following situations, except:
a. Property is distributed to a shareholder who owns 30% of the outstanding stock.
b. Property distributed has built-in losses
c. A subsidiary’s liquidating distribution to its parent corporation or to its minority shareholders
D. Property is distributed to related parties.
2. Purple Corporation has one shareholder, Joshua. One year ago, Joshua transferred land to Purple in a § 351 exchange. Joshua transferred land (basis of $600,000, fair market value of $850,000). In the current year, Purple Corporation adopts a plan of liquidation and distributes the land to Joshua. The land had decreased in value to $310,000. 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 distribution of the land?
a. $0
b. $140,000
c. $150,000
d. $290,000
3. Which of the following statements regarding section 338 is false?
a. Parent corporation will have a basis in the subsidiary’s assets equal to its’ basis in subsidiary’s stock.
b. The subsidiary need not be liquidated.
c. Loss is not recognized by subsidiary.
d. Election must be made by the fifteenth day of ninth month following a qualified stock purchase.
4. Reorganization advantages and disadvantages include all of the following, except:
a. A corporate spin-off permits corporate division without tax consequences if no boot is involved.
b. In a change of identity the tax attributes of the predecessor are retained.
c. In a court-approved reorganization of a bankrupt corporation the creditors can exchange debts for stock tax-free.
d. In a voting stock-for-stock exchange, 51% of the target corporation’s stock must be controlled.
Explanation / Answer
Ans 1:a. Property is distributed to a shareholder who owns 30% of the outstanding stock.
Reason: All the others are covered under the IRS rule for the purpose except the situation that Property is distributed to a shareholder who owns 30% of the outstanding stock
Ans 2: b) $ 140000
Reason: The sale of the land results in a realized loss of $290,000 [$310,000 (amount realized) - $600,000 (basis in land)]. The land had a builtin loss of $150,000 [$450,000 (fair market value) - $600,000 (basis)] on the date it was acquired in the § 351 exchange. Since the land was acquired within two years of the plan of liquidation, a tax avoidance purpose is assumed. There was no business purpose for transferring the property to Purple; thus, the built-in loss limitation disallows $150,000 of the loss. The related-party loss limitation does not apply to sales; therefore, the remaining $140,000 loss realized during the period Purple held the property is recognized
Ans 3: a. Parent corporation will have a basis in the subsidiary’s assets equal to its’ basis in subsidiary’s stock.
Ans 4:d. In a voting stock-for-stock exchange, 51% of the target corporation’s stock must be controlled.
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