CHAPTER 20 CORPORATIONS: DISTRIBUTIONS IN COMPLETE

1.
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.

.

2.
Pursuant to a complete liquidation, Oriole Corporation
distributes to its shareholders land with a basis of $350,000 and a fair market
value of $800,000. The land is subject to a liability of $920,000. What is
Oriole’s recognized gain or loss on the distribution?
a. $0.
b. $120,000 loss.
c. $450,000 gain.
d. $570,000 gain.
e. None of the above.

3.
The stock in Rhea Corporation is owned by Jennifer (80%) and
Lucy (20%), mother and daughter. In a liquidation of the corporation in the
current year, Rhea distributes land that it purchased two years ago for
$675,000 to Lucy. The property has a fair market value on the date of
distribution of $450,000. One year later, Lucy sells the land for
$400,000. What loss,
if any, will Rhea Corporation recognize with respect to the distribution of
land?
a. $0.
b. $45,000.
c. $225,000.
d. $275,000.
e. None of the above.

4.
The stock in Toucan Corporation is held equally by two
brothers. Four years ago, the shareholders transfer property (basis of
$200,000, fair market value of $220,000) to Toucan Corporation as a
contribution to capital. In the current year and pursuant to a complete
liquidation of Toucan, the property is distributed proportionately to the
brothers. At the time of the distribution, the property had a fair market value
of $40,000. What amount of loss will Toucan Corporation recognize on the
distribution of the property?
a. $0.
b. $20,000.
c. $160,000.
d. $180,000.
e. None of the above.

.

5.
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?
a. $0.
b. $21,000.
c. $30,000.
d. $70,000.
e. None of the above.

6.
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 $600,000, fair market value of $450,000) and securities (basis of
$70,000, fair market value of $250,000), while Ellie transferred equipment
(basis of $420,000, fair market value of $700,000). 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 land that had
decreased in value to $310,000 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?
a. $0.
b. $140,000.
c. $150,000.
d. $290,000.
e. None of the above.

7. Last year 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. In the current year, Crow Corporation
adopted a plan of liquidation and 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?
a. $0.
b. $80,000.
c. $90,000.
d. $170,000.
e. None of the above.

8.
During the current year, Ecru Corporation is liquidated and
distributes its only asset, land, to Kena, the sole shareholder. On the date of
distribution, the land has a basis of $250,000, a fair market value of
$650,000, and is subject to a liability of $500,000. Kena, who takes the land
subject to the liability, has a basis of $120,000 in the Ecru stock. With
respect to the distribution of the land, which of the following statements is correct?
a.
Kena recognizes a gain of $530,000.
b.
Ecru Corporation recognizes a gain of $250,000.
c.
Kena recognizes a gain of $30,000.
d.
Kena has a basis of $250,000 in the land.
e.
None of the above.

9.
In the current year, Dove Corporation (E & P of $1
million) distributes all of its property in a complete liquidation. Alexandra,
a shareholder, receives land having a fair market value of $200,000. Dove
Corporation had purchased the land as an investment three years ago for
$125,000, and the land was distributed subject to a $100,000 liability.
Alexandra took the land subject to the $100,000 liability. What is Alexandra’s
basis in the land?
a. $0.
b. $100,000.
c. $125,000.
d. $200,000.
e. None of the above.

10.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.