ACC 570
CHAPTER 20 HOMEWORK SOLUTIONS – CORPORATE LIQUIDATIONS
23.
Pink acquired land (basis=$800k, FMV=$980k) & securities (basis=$70,
FMV=$200k) in 2009 under §351.
Pink liquidates in 2009 & distributes the land, now with FMV=$640
Maria owns 70%; Paul owns 30%.
a.
All to Maria
$0 Loss. None of the $160,000 loss realized [$640,000 (fair market value)
– $800,000 (basis)] on the distribution will be recognized since Maria is a
related party and the land is disqualified property.
b.
All to Paul
$240,000 Loss. Pink Corporation will have a recognized loss of $160,000.
(The land was valued at more than its basis on the date of the transfer to
Pink; thus, the built-in loss limitation does not apply.) Because Paul is an
unrelated party, the related-party loss limitation does not apply.
c.
70% to Maria & 30% to Paul
$48,000 Loss. Even though it’s a pro-rata distribution, the loss on the
portion of the distribution to Maria would be disallowed, because it was
contributed to the corporation within 5 years. Of the $160,000 loss, 30%
(Paul’s interest), or $48,000, would be allowed.
d.
50% to Maria & 50% to Paul
$80,000 Loss. 50% of the $160,000 realized loss, or $80,000, would be
disallowed. The remaining $80,000 loss will be recognized.
e.
Sell the land & distribute the $640k proceeds proportionately.
Upon the sale, Pink Corporation would recognize the entire $160,000 loss.
Pink Corporation should either distribute the land to Paul (option b.) or sell it and
distribute the cash (option e.).
24.
Pink acquired land (§351) in 2009 (basis=$800k, FMV=$700k).
Pink liquidates in 2010 & distributes the land, now with FMV=$640k
Maria owns 70%; Paul owns 30%.
a.
All to Maria
The answer would not change. (No loss deduction allowed, related party.)
b.
All to Paul
The property had a built-in loss of $100,000 when it was transferred to
Pink AND the transfer occurred within 2 years of the date the plan of
liquidation was adopted.
Unless Pink can rebut the presumption of a tax avoidance purpose for the
transfer, the built-in loss of $100,000 is disallowed. The remaining
$60,000 loss will be recognized.
If Pink Corporation can establish a business reason for the transfer of the
property to the corporation and rebut the 2-year presumption rule, the
entire $160,000 loss would be recognized.
c.
70% to Maria & 30% to Paul
Unless Pink Corporation can rebut the presumption of a tax avoidance
purpose for the transfer, the $100,000 built-in loss will be disallowed.
The post-contribution loss on the property distributed to Maria, or $42,000,
will be disallowed because it is a distribution of disqualified property to a
related party. (5-yr rule)
As a result, $18,000 of the loss will be recognized [$60,000 (post-transfer
loss) X 30% (Paul’s distribution)].
d.
50% to Maria & 50% to Paul
Again, the $100,000 built-in loss will be disallowed
The post-contribution loss on the property distributed to Maria, or $30,000,
will be disallowed (not proportionate & 5-yr rule)
As a result, $30,000 of the loss will be recognized [$60,000 (post-transfer
loss) X 50% (Paul’s distribution)].
e.
Sell the land & distribute the proceeds proportionately.
If Pink Corporation cannot show a business purpose for the transfer, the
built-in loss of $100,000 would be disallowed. The remaining $60,000 loss
would be recognized. If Pink can rebut the 2-year presumption rule, the
entire $160,000 loss would be recognized.
26.
After plan of liquidation adopted, Purple Co sells asset for $800k, receiving
$200k cash and a 5-year $600k note ($120k/yr),
Purple distributes the cash & note to Helen (100% owner), who has a $80k basis
in her stock.
The tax results are:

Purple must recognize any remaining profit under the installment method
upon distribution of the notes to Helen.

Helen may defer gain on the receipt of the notes to the point of collection
under the installment method, since the installment note was acquired by the
corporation within 12 months after adopting the liquidation plan.

Helen’s gross profit on the cash & notes is $540,000 [$800,000 (FMV of cash
+ notes) – $80,000 (basis in stock)], so the gross profit percentage is 90%
[$720,000 (gross profit)  $800,000 (FMV of cash + notes)].
 Helen must recognize $180,000 [$200,000 (cash received) x 90% GP
rate)] in the year of the liquidation.
 Helen must report a gain of $108,000 [$120,000 (amount of annual
payment) X 90% (gross profit percentage)] on the collection of each note
over the next five years.
 The interest element is accounted for separately.
29.
31.
Wren acquired 100% of Wren for $390,000 seven years ago.
Cardinal liquidates, distributes assets (FMV=$995k, basis=$725k) & $400k debt.
Cardinal has E&P of $420k & credit carryover of $25k.
a.
Cardinal Corporation recognizes no gain (or loss) on its liquidation (§337).
b.
Wren Corporation recognizes no gain (or loss) on the liquidation (§332).
c.
Wren Corporation takes a carryover basis in the assets, or $150,000 for
the marketable securities and $400,000 for the unimproved land. Wren’s
basis in the Cardinal stock disappears.
d.
Wren Corporation acquires Cardinal Corporation’s E & P of $420,000 and
general business credit carryover of $25,000 under § 381
8/1/10 Egret Corp. acquired 100% of Aqua Corp. for $1m & made §338 election.
Aqua’s assets basis = $700k; E&P = $400k.
Grossed-Up SP & bases each > $1.2m.
Aqua liquidated.
As a result of the § 338 election, Aqua Corporation is treated as having sold all of
its assets on August 9, 2010, the qualified stock purchase date, for an amount
equal to the aggregate deemed sale price of $1.2 million. This deemed sale
results in a recognized gain to Aqua equal to $500,000 [$1.2 million (aggregate
deemed sale price) – $700,000 (basis in assets)]. Aqua is then treated as a new
corporation that purchased those assets for an amount equal to the adjusted
grossed-up basis of $1.2 million. The § 338 election has no tax consequences
for Egret Corporation.
The liquidation of Aqua Corporation qualifies under § 332; thus, neither Aqua [§
337(a)] nor Egret [§ 332(a)] will recognize gain or loss. Egret Corporation will
take a basis in Aqua’s assets equal to Aqua’s (stepped-up) basis of $1.2 million,
and the basis in its Aqua stock disappears. Egret’s holding period in the assets
acquired begins on August 9, 2010. The liquidation also results in a carryover of
Aqua’s tax attributes (e.g., E & P) to Egret, but the amount of such attributes
should be zero given the deemed reincorporation and subsequent liquidation of
Aqua.
.