Prentice Hall's Federal Taxation 2011: Corporations, 24e (Pope) Chapter 6 Corporate Liquidating Distributions

1) Liquidation and dissolution have the same legal meaning. Answer: FALSE
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#) $n a %om&lete liquidation' a lia(ilit) assumed () a shareholder redu%es the shareholder*s amount reali+ed. Answer: ,R-E
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/) $n general' a non%or&orate shareholder that re%eives a distri(ution in %om&lete liquidation of the liquidating %or&oration re%ogni+es his or her entire reali+ed gain as a %a&ital gain. Answer: ,R-E
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") ,he ad0usted (asis of &ro&ert) re%eived in a %om&lete liquidation is its fair mar1et value on the distri(ution date. Answer: ,R-E
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.) 2enerall)' a %or&oration re%ogni+es gain' (ut not loss' on a liquidating distri(ution. Answer: FALSE
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) Se%tion // &revents re%ognition of a loss when ma1ing a &ro rata distri(ution of &ro&ert) to a related &erson. Answer: FALSE
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4) ,he liquidation of a su(sidiar) %or&oration must (e %om&leted within one ta5 )ear to re%eive nonre%ognition treatment. Answer: FALSE
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3) A su(sidiar) re%ogni+es no gain or loss on a distri(ution to a &arent %or&oration owning the ma0orit) of the su(sidiar)*s sto%1 in a %om&lete liquidation. Answer: FALSE
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6) A su(sidiar) must re%ogni+e de&re%iation re%a&ture in%ome when the su(sidiar) is liquidated into the &arent. Answer: FALSE
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17) Liquidating e5&enses are generall) dedu%ted as ordinar) and ne%essar) (usiness e5&enses. Answer: ,R-E
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11) A %or&oration is required to file Form 6 liquidation. Answer: ,R-E

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within /7 da)s after the ado&tion of a &lan of

1#) A &lan of liquidation must (e redu%ed to writing in order to (e a%%e&ted () the $nternal Revenue Servi%e. 1 Copyright 2011 Pearson Education, Inc.

Answer: FALSE

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1/) $n a %om&lete liquidation of a %or&oration whi%h of the following is false8 A) All sto%1 of the liquidating %or&oration is %an%eled or redeemed. 9) ,he %or&oration %eases to (e a going %on%ern. C) ,he %or&oration divests itself of su(stantiall) all its &ro&erties. :) ,he liquidation of a %or&oration means it has undergone dissolution. Answer: :
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1") $dentif) whi%h of the following statements is false. A) ,he ta5 attri(utes of the liquidating %or&oration %arr) over to the shareholders when the liquidation is %ondu%ted under the general liquidation rules. 9) 9a1er Cor&oration was formed in a Se%. /.1 e5%hange three )ears ago () Emil' Fred' and 2eorge who own equal sto%1 interests. ,he %or&oration %an (e liquidated ta5!free under the s&e%ial liquidation rules of Se%s. //# and //4. C) ,he terms ;liquidation; and ;dissolution; are s)non)mous. :) All are false. Answer: :
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1.) <hen a %or&oration liquidates' it &erforms three a%tivities. <hat is the general order of these a%tivities in a &lan of liquidation8 A) &a) de(ts' distri(ute &ro&ert) to shareholders' and wind u& its affairs 9) wind u& its affairs' distri(ute &ro&ert) to shareholders' &a) de(ts C) &a) de(ts' wind u& its affairs' and distri(ute &ro&ert) to shareholders :) wind u& its affairs' &a) de(ts' and distri(ute &ro&ert) to shareholders Answer: :
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1 ) =o)a Cor&oration ado&ts a &lan of liquidation last )ear. All (ut a nominal amount of =o)a*s assets are distri(uted to its shareholders within the )ear. <hi%h of the following statements is not true8 A) ,he liquidation of =o)a Cor&oration means the %or&oration has undergone dissolution. 9) =o)a Cor&oration retains its state %harter. C) =o)a Cor&oration e5isten%e is &reserved. :) =o)a Cor&oration has (een liquidated for ta5 &ur&oses. Answer: A
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14) Liquidation rules generall) are a&&lied the same to the following organi+ations e5%e&t for A) su(sidiar) %or&orations ! 37> %ontrolled. 9) C %or&orations. C) S %or&orations. :) su(sidiar) %or&orations ! less than 37> %ontrolled. Answer: A
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13) Riverwal1 Cor&oration is liquidated' with ?uan re%eiving @.'777 in mone) and other &ro&ert) having a @ '777 F=A. ?uan*s (asis in his Riverwal1 sto%1 is @3'777. -&on liquidation' ?uan must re%ogni+e a gain of A) 7. 9) @#'777. C) @/'777. :) @11'777. Answer: C
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16) Riverwal1 Cor&oration is liquidated' with ?uan re%eiving @.'777 in mone)' other &ro&ert) having a @ '777 F=A' and a @1'777 mortgage on the &ro&ert). ?uan*s (asis in his River wal1 sto%1 is @3'777. -&on liquidation' ?uan must re%ogni+e a gain of A) 7. 9) @#'777. C) @/'777. :) @11'777. Answer: 9
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#7) ,e5as Cor&oration is undergoing a %om&lete liquidation and distri(utes land to Ro(ert' one of its shareholders' in e5%hange for all of Ro(ert*s sto%1. ,he land has a (asis of @/77'777 and a F=A of @"77'777 on ,e5as Cor&oration*s (oo1s and is su(0e%t to a @/#.'777 lia(ilit). Ro(ert assumes the lia(ilit) on the &ro&ert). Ro(ert*s (asis in his ,e5as Cor&oration sto%1 is @177'777. <hat is the amount of gain or loss re%ogni+ed () Ro(ert on the distri(ution8 A) @14.'777 gain 9) @#.'777 gain C) Co gain or loss is re%ogni+ed. :) @#.'777 loss Answer: : E5&lanation: :) F=A of &ro&ert) @ "77'777 =inus: Lia(ilit) assumed D /#.'777) Amount reali+ed @ 4.'777 =inus: 9asis of sto%1 D 177'777) Loss re%ogni+ed D@ #.'777)
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#1) Ro(ot Cor&oration is liquidated with =art) re%eiving &ro&ert) having an ad0usted (asis of @ 7'777 and a F=A of @67'777. ,he &ro&ert) is su(0e%t to a @37'777 mortgage whi%h =art) assumes. =art)*s (asis in the Ro(ot sto%1 surrendered is @.7'777. =art) must re%ogni+e A) a @"7'777 loss. 9) no gain or loss. C) a @ 7'777 gain. :) none of the a(ove Answer: A E5&lanation: A) F=A of &ro&ert) @ 67'777 =inus: Lia(ilit) assumed D 37'777) Amount reali+ed @ 17'777 =inus: 9asis of sto%1 D .7'777) Loss re%ogni+ed D@"7'777)
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##) $dentif) whi%h of the following statements is true. A) ,he method of a%%ounting used () shareholders involved in a %om&lete liquidation is relevant when determining the )ear in whi%h the shareholder*s gain or loss should (e re&orted. 9) An a%%rual method of a%%ounting ta5&a)er re%ogni+es hisEher reali+ed gain on a %or&orate liquidation when there has (een a%tual or %onstru%tive re%ei&t of the liquidating distri(utionDs). C) $f a shareholder assumes or a%quires lia(ilities of the liquidating %or&oration' the amount of these lia(ilities does not redu%e the amount reali+ed () the shareholder. :) All are false. Answer: A
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#/) Pro&ert) re%eived in a %or&orate liquidation () a non%or&orate shareholder has A) a (asis equal to its (asis on the liquidating %or&oration*s (oo1s in%reased () an) gain re%ogni+ed () the shareholder u&on re%ei&t of the &ro&ert). $ts holding &eriod in%ludes the holding &eriod of the shareholder*s sto%1. 9) a (asis equal to its (asis on the liquidating %or&oration*s (oo1s in%reased () an) gain re%ogni+ed () the shareholder u&on re%ei&t of the &ro&ert). $ts holding &eriod %ommen%es on the da) after the distri(ution date. C) a (asis equal to its F=A redu%ed () an) lia(ilities assumed () the shareholder. $ts holding &eriod %ommen%es on the da) after the distri(ution date. :) a (asis equal to its F=A. $ts holding &eriod %ommen%es on the da) after the distri(ution date. Answer: :
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#") $dentif) whi%h of the following statements is true. A) $n general' a non%or&orate shareholder that re%eives a distri(ution in %om&lete liquidation of the liquidating %or&oration re%ogni+es his or her entire reali+ed gain as a %a&ital gain. 9) ,he (asis for nonmone) &ro&ert) re%eived () a non%or&orate shareholder as &art of a liquidating distri(ution is the same as its (asis on the (oo1s of the liquidating %or&oration. C) ,he liquidating %or&oration does not re%ogni+e gains and losses when ma1ing a distri(ution of nonmone) &ro&ert). :) All are false. Answer: A
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#.) $dentif) whi%h of the following statements is true. A) A loss re%ogni+ed () a shareholder u&on %om&lete liquidation of a %or&oration ma) not qualif) for ordinar) loss treatment if the sto%1 is Se%. 1#"" sto%1. 9) ,he loss that is re%ogni+ed () an individual shareholder on the liquidation of a %or&oration 4 Copyright 2011 Pearson Education, Inc.

is a %a&ital loss' u& to %ertain limits' if the sto%1 is Se%. 1#"" sto%1. C) ,he loss re%ogni+ed () a %or&orate shareholder on the worthlessness of the %ontrolled su(sidiar)*s sto%1 is an ordinar) loss. :) All are false. Answer: C
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# ) -nder a &lan of %om&lete liquidation' Coast Cor&oration distri(utes land with a @/77'777 ad0usted (asis and a @"77'777 F=A to <illiam' a #.> shareholder. <illiam has a @#77'777 (asis in his Coast sto%1. ,he land is inventor) in the hands of Coast Cor&oration. Coast Cor&oration must re%ogni+e A) no gain. 9) @177'777 of ordinar) in%ome. C) @177'777 of long!term %a&ital gain. :) @#77'777 of ordinar) in%ome. Answer: 9
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#4) $dentif) whi%h of the following statements is true. A) <ith limited e5%e&tions' a loss %an (e re%ogni+ed () a liquidating %or&oration when it ma1es a liquidating distri(ution of &ro&ert) that has de%lined in value. 9) <hen %om&uting the %or&orate level gain on a liquidating distri(ution' the F=A of the &ro&ert) %annot e5%eed the lia(ilit) assumed or a%quired () the shareholder. C) ,he F=A of &ro&ert) distri(uted () a liquidating %or&oration %an (e less than the amount of the lia(ilit) assumed or a%quired () the shareholder. :) All are false. Answer: A
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#3) -nder a &lan of %om&lete liquidation' Fe) Cor&oration distri(utes land Dnot a disqualified &ro&ert)) with an ad0usted (asis of @"17'777 and a F=A of @/77'777 for all Sharon*s sto%1. Sharon*s (asis in her .> interest in the Fe) sto%1 is @#.7'777. Find Sharon*s (asis in the land and Fe) Cor&oration*s re%ogni+ed gain or loss. A) Basis Recognized Gain/Loss @/77'777 @117'777 loss 9) Basis Recognized Gain/Loss @#.7'777 @117'777 loss C) Basis Recognized Gain/Loss @/77'777 @!7! :) Basis Recognized Gain/Loss @#.7'777 @!7! Answer: A
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#6) 9arnett Cor&oration owns an offi%e (uilding that %ost @677'777. 9arnett has ta1en @ 77'777 of de&re%iation on the (uilding. ,he &ro&ert) is su(0e%t to a @ 77'777 mortgage. ,he offi%e (uilding has a %urrent F=A of @"77'777. 9arnett Cor&oration is liquidated and the offi%e (uilding is distri(uted to a single individual shareholder who assumes the mortgage. 9arnett Cor&oration must re%ogni+e A) no gain or loss. 9) a @177'777 gain. C) a @/77'777 gain. :) none of the a(ove Answer: C E5&lanation: C) ,he (uilding is deemed to (e worth at least the amount of the lia(ilit) that is assumed. ,he %or&oration*s (asis in the (uilding is @/77'777 D%ost less de&re%iation) and the lia(ilit) assumed is @ 77'777B therefore' 9arnett*s gain is @/77'777. :eemed F=A =inus: Ad0usted (asis Re%ogni+ed gain
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@ 77'777 GA%quisition %ost @677'777 D/77'777) =inus: :e&re%iation D 77'777) @/77'777 Ad0usted (asis @/77'777

/7) $dentif) whi%h of the following statements is true. A) A liquidating distri(ution of &ro&ert) other than a disqualified &ro&ert) that is made rata(l) to all shareholders D(ased on their sto%1holdings) will &ermit the re%ognition of loss on the &ortion of the distri(ution that is made to a related &erson. 9) A su(sidiar) %or&oration %an re%ogni+e losses on distri(utions to either the &arent %or&oration or minorit) shareholders in a Se%. //# liquidation. C) Se%tion // &revents re%ognition of a loss when ma1ing a &ro rata distri(ution of &ro&ert) to a related &erson. :) All are false. Answer: A
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/1) $dentif) whi%h of the following statements is true. A) ,he loss reali+ed on the sale of a &ro&ert) is disallowed when su%h &ro&ert) was re%eived () a %or&oration as a %ontri(ution of %a&ital in a transa%tion having as its &rin%i&al &ur&ose the re%ognition of loss &ursuant to the %or&oration*s su(sequent liquidation later in the same ta5a(le )ear. 9) Losses %laimed in a ta5 return filed (efore the ado&tion of the &lan of liquidation are not restri%ted () Se%. // Dd)D#). C) Pro&erties a%quired () a liquidating %or&oration as a %a&ital %ontri(ution o%%urring within three )ears of the ado&tion of a &lan of liquidation are generall) &resumed to have a ta5 avoidan%e motive. :) All are false. Answer: A
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/#) ,he sto%1 of Coo&er Cor&oration is 47> owned () Carole and /7> owned () Carole*s (rother' Chris. :uring #77.' Chris transferred &ro&ert) D(asis of @177'777 and F=A of @1#7'777) as a %ontri(ution to %a&ital of Coo&er. :uring Fe(ruar) #77 ' Coo&er ado&ted a &lan of liquidation and su(sequentl) made a &ro rata distri(ution of the &ro&ert) (a%1 to Carole and Chris. At the time of the liquidation' the &ro&ert) had a F=A of @37'777. <hat amount of loss %an (e re%ogni+ed () Coo&er on the distri(ution of &ro&ert)8 A) @7 9) @ '777 C) @1#'777 :) @#7'777 Answer: A E5&lanation: A) Co loss %an (e re%ogni+ed (e%ause Carole and Chris D(rother and sister) ea%h %onstru%tivel) own 177> of the %or&oration and the &ro&ert) was a%quired in a %arr)over (asis transa%tion within the . )ear &eriod &re%eding the liquidating distri(ution
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//) Last )ear' ,o() made a %a&ital %ontri(ution of a &ret+el ma1er having a @#'777 ad0usted (asis and a @#77 F=A to Fe1e Cor&oration in e5%hange for additional sto%1. ,his )ear' Fe1e Cor&oration ado&ted a &lan of liquidation. Prior to the ado&tion of the liquidation &lan' Fe1e had not used the &ret+el ma1er in %onne%tion with the %ondu%t of its trade or (usiness. <hi%h of the following statements is true8 A) Fe1e Cor&oration ma) re%ogni+e a loss of @1'377. 9) Fe1e Cor&oration ma) re%ogni+e a loss of @#77. C) Fe1e Cor&oration*s (asis for determining the loss will (e @#'777. :) Fe1e Cor&oration*s (asis for determining the loss will (e @#77. Answer: :
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/") ,o() made a %a&ital %ontri(ution of a &ret+el ma1er having a @#'777 ad0usted (asis and a @#77 F=A to Fe1e Cor&oration in e5%hange for additional sto%1 last )ear. Later that same )ear' Fe1e sold the &ret+el ma1er for @/77. ,his )ear' Fe1e ado&ted a &lan of liquidation. Previousl)' Fe1e had never used the &ret+el ma1er in %onne%tion with the %ondu%t of its trade or (usiness. ,he sale was re&orted on Fe1e*s %urrent ta5 return. <hat re&orting o&tion does Fe1e Cor&oration not have (e%ause of its &lan of liquidation8 A) File an amended ta5 return for the ta5 )ear in whi%h the ta5 loss was originall) %laimed. 9) Re%a&ture the loss on the ta5 return for the )ear the &lan for liquidation was ado&ted. C) Re%ogni+e a gain of @177 for the %urrent )ear. :) none of the a(ove Answer: C
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/.) :e5er Cor&oration is owned 47> () Am) and /7> () 9rad. :e5er Cor&oration owns Eagle Cor&oration sto%1 with a @.7'777 ad0usted (asis and a @/7'777 F=A. ,he sto%1 is not disqualified &ro&ert). As &art of a %om&lete liquidation' the Eagle Cor&oration sto%1 is distri(uted to Am). Am)*s (asis in her :e5er sto%1 is @"7'777. :e5er Cor&oration will re%ogni+e A) no loss. 9) a @17'777 loss. C) a @#7'777 loss. :) none of the a(ove. Answer: A
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/ ) Cow(o) Cor&oration owns 67> of the single %lass of sto%1 in :oggie Cor&oration. ,he other 17> is owned () =iguel' an individual. Cow(o)*s (asis in its :oggie Cor&oration sto%1 is @177'777 and =iguel*s (asis is @.7'777. :oggie Cor&oration distri(utes &ro&ert) having an ad0usted (asis of @1.7'777 and a F=A of @.77'777 to Cow(o) Cor&oration and @ 7'777 of mone) to =iguel as a liquidating distri(ution. :oggie and Cow(o) Cor&orations must 7 Copyright 2011 Pearson Education, Inc.

re%ogni+e gain of A) Doggie Cowboy @7 @7 9) Doggie Cowboy @17'777 @7 C) Doggie Cowboy @"77'777 @/.7'777 :) Doggie Cowboy @/.7'777 @"77'777 Answer: A E5&lanation: A) ,he 67> sto%1 ownershi& () Cow(o) meets the Se%. //# minimum sto%1 ownershi& rules. ,herefore' no gain or loss is re%ogni+ed () the su(sidiar) %or&oration or the &arent %or&oration
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/4) Parent Cor&oration owns 177> of the single %lass of sto%1 of Su(sidiar) Cor&oration. Parent*s (asis in the Su(sidiar) sto%1 is @.77'777 when Parent %om&letel) liquidates Su(sidiar) Cor&oration within a single ta5 )ear. ,he Su(sidiar) Cor&oration assets have a @477'777 ad0usted (asis and an @377'777 F=A at liquidation. As a result of the liquidation' Parent must re%ogni+e A) @7 gain. 9) @#77'777 gain. C) @/77'777 gain. :) none of the a(ove Answer: A E5&lanation: A) 177> ownershi& () Parent Cor&oration of Su(sidiar)*s single %lass of sto%1 meets the 37> minimum sto%1 ownershi& requirement of Se%. //# for nonre%ognition of gain or loss
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/3) $dentif) whi%h of the following statements is true. A) A &arent %or&oration %annot liquidate a su(sidiar) %or&oration Dhaving (ut a single %lass of sto%1) and avoid re%ogni+ing its reali+ed gain unless the &arent %or&oration owns at least 37> of the su(sidiar)*s sto%1. 9) ,he liquidation of a su(sidiar) %or&oration must (e %om&leted within one ta5 )ear to re%eive nonre%ognition treatment. C) ,he &rovisions &ermitting a ta5!free liquidation of a su(sidiar) %or&oration a&&l) to (oth %or&orate and non%or&orate shareholders of the su(sidiar). :) All are false. Answer: A
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/6) Carl) owns #.> of 9ase Cor&oration*s single %lass of sto%1 and Premier Cor&oration owns the remaining 4.>. Carl)*s (asis in the 9ase sto%1 is @#77'777 and Premier Cor&oration*s (asis in the 9ase sto%1 is @ 77'777. Carl) re%eives &ro&ert) with a @14.'777 ad0usted (asis and a @#.7'777 F=A and Premier Cor&oration re%eives &ro&ert) with a @ 77'777 ad0usted (asis and a @4.7'777 F=A in %om&lete liquidation of 9ase Cor&oration. All of 9ase*s %ash is used to &a) it*s lia(ilities. <hi%h of following statements is %orre%t %on%erning the ta5 effe%ts of the liquidation8 A) Ceither Carl) nor Premier Cor&oration will re%ogni+e gain. 9) Carl) will re%ogni+e some gain (ut Premier Cor&oration will not re%ogni+e an) gain. C) 9oth Carl) and Premier will re%ogni+e some gain. :) Carl) will not re%ogni+e an) gain (ut Premier will re%ogni+e some gain. Answer: C E5&lanation: C) 4.> sto%1 ownershi& () Premier Cor&oration does not meet the 37> sto%1 ownershi& minimum of Se%. //# in order for nonre%ognition of gain or loss to o%%ur
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"7) <hen a su(sidiar) %or&oration is liquidated into its &arent %or&oration under a formal &lan of liquidation' the distri(utions must ta1e &la%e within A) a si5!month &eriod. 9) a 1#!month &eriod. C) the %urrent and ne5t ta5 )ear. :) the %urrent and ne5t three ta5 )ears. Answer: :
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"1) Parent Cor&oration for ten )ears has owned all of the sto%1 of Su(sidiar) Cor&oration' whi%h manufa%tures widgets. Parent*s (asis in Su(sidiar)*s sto%1 is @.77'777. Su(sidiar) Cor&oration is insolvent and has no assets to redeem an) of the sto%1 that Parent Cor&oration owns when it liquidates. Cearl) all of Su(sidiar)*s gross in%ome during the &ast five )ears has %ome from non&assive a%tivities. Parent %an re%ogni+e A) a @.77'777 short!term %a&ital loss. 9) a @.77'777 long!term %a&ital loss. C) a @.77'777 ordinar) loss. :) a @.77'777 (ad de(t dedu%tion. Answer: C
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"#) 9all Cor&oration owns 37> of Cet Cor&oration*s sto%1 and ?a%1 owns the remaining #7> of Cet Cor&oration*s sto%1. 9all*s (asis in the Cet sto%1 is @#77'777 and ?a%1*s (asis in the Cet sto%1 is @177'777. -nder a &lan of %om&lete liquidation' 9all Cor&oration re%eives &ro&ert) with an ad0usted (asis of @"77'777 and a F=A of @377'777 and ?a%1 re%eives &ro&ert) with an ad0usted (asis of @.7'777 and a F=A of @#77'777. 9all and ?a%1*s re%ogni+ed gains on the liquidation are: A) Ba !ac" @7 @7 9) Ba !ac" @7 @177'777 C) Ba !ac" @#77'777 @.7'777 :) Ba !ac" @ 77'777 @177'777 Answer: 9
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"/) 9all Cor&oration owns 37> of Cet Cor&oration*s sto%1 and ?a%1 owns the remaining #7> of Cet Cor&oration*s sto%1. 9all*s (asis in the Cet sto%1 is @#77'777 and ?a%1*s (asis in the Cet sto%1 is @177'777. -nder a &lan of %om&lete liquidation' 9all Cor&oration re%eives &ro&ert) with an ad0usted (asis of @"77'777 and a F=A of @377'777 and ?a%1 re%eives &ro&ert) with an ad0usted (asis of @.7'777 and a F=A of @#77'777. 9all and ?a%1*s (ases in the &ro&ert) re%eived are A) Ba !ac" @377'777 @#77'777 9) Ba !ac" @"77'777 @#77'777 C) Ba !ac" @"77'777 @ .7'777 :) Ba !ac" @#77'777 @177'777 Answer: 9
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"") =ar1et Cor&oration owns 177> of Su(sidiar) Cor&oration*s sto%1. =ar1et Cor&oration %om&letel) liquidates Su(sidiar) Cor&oration re%eiving land with a @"77'777 ad0usted (asis and a @.77'777 F=A in e5%hange for Su(sidiar) sto%1' whi%h has a @/77'777 ad0usted (asis. =ar1et Cor&oration has a (asis in the land of A) @/77'777. 9) @"77'777. C) @.77'777. :) none of the a(ove Answer: 9 E5&lanation: 9) Se%tion //"D()D1) &rovides for a %arr)over (asis
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".) :ust) Cor&oration owns 67> of Pala%e Cor&oration*s sto%1 and Susan owns the remaining sto%1. :ust) Cor&oration*s sto%1 (asis is @/77'777 and Susan*s sto%1 (asis is @#7'777. -nder a &lan of %om&lete liquidation' :ust) Cor&oration re%eives &ro&ert) with a @"77'777 ad0usted (asis and a @."7'777 F=A and Susan re%eives &ro&ert) with a @#7'777 ad0usted (asis and a @ 7'777 F=A. ,he (ases of the &ro&erties are A) Dusty #usan @/77'777 @#7'777 9) Dusty #usan @"77'777 @#7'777 C) Dusty #usan @"77'777 @ 7'777 :) Dusty #usan @."7'777 @ 7'777 Answer: C
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" ) $dentif) whi%h of the following statements is false. A) =inorit) shareholders involved in a Se%. //# su(sidiar) liquidation must re%ogni+e gain or loss under the Se%. //1 general liquidation rules. 9) ,he &arent %or&oration ta1es a (asis in &ro&ert) re%eived when liquidating a su(sidiar) %or&oration in a Se%. //# liquidation equal to its (asis to the su(sidiar) %or&oration. C) Se%tion //# is a&&li%a(le to (oth the &arent %or&oration and the minorit) shareholders if the) e5ist. :) Pro&ert) re%eived () a minorit) shareholder ta1es a (asis equal to its fair mar1et value. Answer: C
Page Ref.: C: !1/

"4) $dentif) whi%h of the following statements is false. A) Liquidating distri(utions made to minorit) shareholders in the ta5!free liquidation of a %ontrolled su(sidiar) %or&oration are treated () the liquidating %or&oration in the same wa) as nonliquidating distri(utions. 9) Se%. //4Da) &rovides that the liquidating %or&oration re%ogni+es no gain or loss on the distri(ution of &ro&ert) to the 37> distri(utee in a %om&lete Se%. //# liquidation. C) ,he de&re%iation re%a&ture &rovisions in Se%s. 1#". and 1#.7 override the Se%. //4Da) nonre%ognition rule if a %ontrolled su(sidiar) %or&oration is liquidated into its &arent %or&oration. :) A %or&oration that distri(utes the sto%1 of a su(sidiar) ma) ele%t to treat the distri(ution as a sale of the su(sidiar)*s assets. Answer: C
Page Ref.: C: !1/

"3) La1e Cit) Cor&oration owns all the sto%1 in Colum(ia Cor&oration. Pursuant to a &lan of %om&lete liquidation' Colum(ia distri(utes land having a @.77'777 F=A and a @#77'777 (asis to La1e Cit). Colum(ia*s gain with res&e%t to the distri(ution will (e A) no gain re%ogni+ed. 9) @#77'777. C) @/77'777. :) @.77'777. Answer: A
Page Ref.: C: !1#' C: !1/B E5am&le C: !1.

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"6) La1e Cit) Cor&oration owns all of the sto%1 in Colum(ia Cor&oration. Pursuant to a &lan of %om&lete liquidation' Colum(ia distri(utes land having a @.77'777 F=A and a @#77'777 (asis to La1e Cit). La1e Cit)*s (asis in the land will (e A) %annot (e determined from fa%ts &resented 9) 7. C) @#77'777. :) @.77'777. Answer: C
Page Ref.: C: !1/B E5am&le C: !1

.7) ,he general rule for ta5 attri(utes of liquidating %or&orations is A) the) disa&&ear when the liquidation is %om&lete. 9) the) %arr)over for five )ears. C) the) disa&&ear onl) for %ontrolled su(sidiar) %or&orations. :) the) %arr)over for an indefinite &eriod of time. Answer: A
Page Ref.: C: !1"

.1) Sand)' a %ash method of a%%ounting ta5&a)er' has a (asis of @" '777 in her .77 shares of Cewt Cor&oration sto%1. She re%eives the following distri(utions as &art of Cewt*s &lan of liquidation. =ar%h /1' #776 ?ul) 1.' #776 Covem(er 1.' #776 ?anuar) 1.' #717 @17'777 17'777 17'777 17'777

,he amount of the final distri(ution is not 1nown on :e%em(er /1' #774. <hat are the ta5 %onsequen%es of the distri(utions8 A) Sand) will re%ogni+e a loss of @"'.77 in #776 and a @1'.77 loss in #717. 9) Sand) will re%ogni+e the entire loss in #776. C) Sand) will re%ogni+e the entire loss in #717. :) none of the a(ove Answer: C
Page Ref.: C: !1"

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.#) Prime Cor&oration liquidates its 3.>!owned su(sidiar) 9ass Cor&oration under the &rovisions of Se%s. //# and //4. 9ass Cor&oration distri(utes land to its minorit) shareholder' ?ohn' who owns a 1.> interest. ,he &ro&ert) re%eived () ?ohn has a @..'777 F=A. ,he land was used in the 9ass Cor&oration*s (usiness and has a @ .'777 ad0usted (asis and is su(0e%t to a @17'777 lia(ilit) whi%h is assumed () ?ohn. ?ohn*s (asis in his sto%1 is @#.'777. <hat gain or loss will ?ohn and 9ass Cor&oration re%ogni+e on the distri(ution of the land8 A) !ohn Bass @#7'777 gain @!7! 9) !ohn Bass @#7'777 gain @17'777 loss C) !ohn Bass @/7'777 gain @!7! :) !ohn Bass @/7'777 gain @17'777 loss Answer: 9
Page Ref.: C: !1"B E5am&le C: !13

./) 2reg' a %ash method of a%%ounting ta5&a)er' owns 177 shares of Par1er Cor&oration sto%1 with a (asis of @#7'777. 2reg re%eives two liquidating distri(utions of @3'777 on =ar%h / of last )ear' and @3'777 on August 3 of this )ear. ,he amount of the se%ond distri(ution is not 1nown until ?une 1. of this )ear. 2reg re%ogni+es a A) gain of @3'777 last )ear and a loss of @1#'777 this )ear. 9) loss of @#'777 last )ear and a loss of @#'777 this )ear. C) no loss last )ear and a @"'777 loss this )ear. :) none of the a(ove Answer: C E5&lanation: C) ,he shareholder (asis is re%overed first and the re%ognition of gain o%%urs onl) after the (asis has (een re%overed in a series of &artiall) liquidating distri(utions. Co loss is generall) re%ogni+ed until the final liquidating distri(ution has (een re%eived
Page Ref.: C: !1.B E5am&le C: !#7

.") 9ar(ara owns 177 shares of 9ond Cor&oration sto%1 with a (asis of @"7'777. 9ar(ara re%eives two liquidating distri(utions in%luding @1 '777 &aid last )ear and @#7'777 &aid in the %urrent )ear. An additional distri(ution of undetermined amount is e5&e%ted ne5t )ear. Hn last )ear*s ta5 return' 9ar(ara %an re%ogni+e a loss of A) @7. 9) @1'777. C) @"'777. :) @1"'777. Answer: A E5&lanation: A) ,he shareholder*s (asis is re%overed first and the re%ognition of gain o%%urs onl) after the (asis has (een re%overed in a series of &artiall) liquidating distri(utions
Page Ref.: C: !1.B E5am&le C: !#7

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..) Io&e Cor&oration was liquidated four )ears ago. ,eresa re&orted a @"7'777 long!term %a&ital gain due to the liquidation on her individual ta5 return. ,his )ear' ,eresa &a)s @ '777 as &art of the settlement of a lawsuit against Io&e. :ue to the @ '777 &a)ment' ,eresa re%ogni+es a A) @ '777 long!term %a&ital loss. 9) @ '777 short!term %a&ital loss. C) @ '777 ordinar) loss. :) none of the a(ove Answer: A
Page Ref.: C: !1.' E5am&le C: !#1

. ) Fe) Cor&oration distri(utes a &atent with an indetermina(le value to 2ar) as &art of a &lan of %om&lete liquidation. $n addition' 2ar) re%eives @"7'777 %ash and land with a @47'777 F=A and a @/7'777 ad0usted (asis. 2ar)*s (asis in the Fe) sto%1 Da %a&ital asset) surrendered is @1#7'777. $f 2ar) relies on the o&en transa%tion do%trine' at the liquidation date he must re%ogni+e A) @7 gain. 9) @17'777 %a&ital loss. C) @/7'777 %a&ital loss. :) @47'777 %a&ital gain. Answer: A E5&lanation: A) ,he liquidating distri(ution is an o&en transa%tion. Co gain or loss is re%ogni+ed sin%e the amount re%eived D@117'777) is less than 2ar)*s @1#7'777 (asis in his sto%1
Page Ref.: C: !1

.4) :uring #776' ,ra%1 Cor&oration distri(utes &ro&ert) to Cind) as &art of a %om&lete liquidation. Pro&ert) in%luded in the distri(ution is @/7'777 in %ash' land with a @"7'777 ad0usted (asis and a @ 7'777 F=A' and a %o&)right without an as%ertaina(le F=A and having a +ero (asis. ,he first &a)ment to Cind) of @3'777 for use of the %o&)righted &ro&ert) o%%urs in #717. Cind) has a (asis in the ,ra%1 sto%1 of @6.'777 immediatel) &re%eding the liquidation. ,he minimum amount of gain that Cind) must re%ogni+e is A) @/'777 gain in #717. 9) @7 gain in #776. C) @/'777 gain in #776' whi%h is re&orted on an amended %urrent )ear ta5 return that is filed in #717. :) none of the a(ove Answer: 9 E5&lanation: 9) Co gain is re%ogni+ed sin%e the %o&)right does not have an as%ertaina(le F=A and Cind) %an a&&arentl) rel) on the o&en transa%tion do%trine to determine her gain or loss. Cind) has a @.'777 JD@/7'777 K @ 7'777) ! @6.'777L unre%overed (asis immediatel) after the liquidation. ,he re%ei&t of the first &a)ment of @3'777 results in a @/'777 D@3'777 ! @.'777) gain (eing re%ogni+ed in the following )ear.
Page Ref.: C: !1

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.3) $dentif) whi%h of the following statements is false. A) An individual ta5&a)er' who is assessed an additional &a)ment of mone) (ased on sto%1 ownershi& in a %or&oration whose sto%1 is redeemed in a %om&lete liquidation' ma) re%ogni+e a %a&ital loss to the e5tent of the additional assessment. 9) ,he o&en transa%tion do%trine defers the shareholder*s gain or loss from a liquidation until the assets %an (e valued () sale or %olle%tion. C) ,he o&en transa%tion do%trine as a&&lied to %om&lete %or&orate liquidations refers to the numerous &lanning alternatives availa(le when liquidating a %or&oration. :) ,he $RS asserts that the o&en transa%tion do%trine should (e used onl) in e5traordinar) %ir%umstan%es. Answer: C
Page Ref.: C: !1

.6) $dentif) whi%h of the following statements is true. A) -&on liquidation' an) %a&itali+ed e5&enditures unamorti+ed at the time of liquidation should (e dedu%ted if the) have no further value to the %or&oration. 9) Shareholders who re%eive an installment o(ligation as &art of their liquidating distri(ution ordinaril) re&ort the F=A of their o(ligation as &art of the %onsideration re%eived to %al%ulate the amount of re%ogni+ed gain or loss. C) A liquidating %or&oration treats e5&enses asso%iated with selling its &ro&ert) as an off!set against the sales &ro%eeds. :) All the a(ove are true. Answer: :
Page Ref.: C: !1 ' C: !14

7) Iomewood Cor&oration ado&ts a &lan of liquidation on ?une 1. and shortl) thereafter sells a &ar%el of land on whi%h it reali+es a @.7'777 gain De5%luding the effe%ts of a @.'777 sales %ommission). Iomewood &a)s its legal %ounsel @#'777 to draft the &lan of liquidation. ,he a%%ountant fees for the liquidation are @1'777' whi%h are also &aid during the )ear. <hat is Iomewood Cor&oration*s reali+ed gain on the sale of land and dedu%ti(le liquidation e5&enses8 A) Gain Liquidation$%penses @".'777 @/'777 9) Gain Liquidation $%penses @.7'777 @#'777 C)Gain Liquidation $%penses @..'777 @/'777 :)Gain Liquidation $%penses @.7'777 @1'777 Answer: A
Page Ref.: C: !1 B E5am&le C: !##

1) <hen a liquidating %or&oration &a)s off an unse%ured de(t o(ligation A) the %or&oration re%ogni+es no gain or loss if it uses a&&re%iated &ro&ert) 9) the %or&oration re%ogni+es no gain or loss if it uses %ash C) the %or&oration re%ogni+es an) gains (ut not losses reali+ed. :) the %or&oration re%ogni+es losses (ut not gains reali+ed Answer: 9
Page Ref.: C: !14

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#) $dentif) whi%h of the following statements is true. A) ,he Se%. //# nonre%ognition rules a&&l) to the &arent %or&oration when a su(sidiar) %or&oration transfers &ro&ert) to the &arent %or&oration in &a)ment of the su(sidiar)*s de(t o(ligation. 9) A su(sidiar) %or&oration is &revented from re%ogni+ing gain or loss when transferring &ro&ert) to its &arent %or&oration in satisfa%tion of an inde(tedness it owes to the &arent %or&oration as &art of its %om&lete liquidation. C) Conre%ognition of gain or loss rules a&&l) to a su(sidiar) %or&oration when' &ursuant to its %om&lete liquidation' the su(sidiar) transfers &ro&ert) to a third &art) %reditor. :) All are false. Answer: 9
Page Ref.: C: !14

/) Parent Cor&oration owns all of Su(sidiar) Cor&oration*s sto%1. $n addition' Parent Cor&oration owns @177'777 Dfa%e amount and (asis) of Su(sidiar) Cor&oration*s (onds. <hen Su(sidiar) Cor&oration is %om&letel) liquidated' it distri(utes &ro&ert) with a @47'777 ad0usted (asis and a @177'777 F=A to Parent Cor&oration in redem&tion of the Su(sidiar) Cor&oration (onds. Following the liquidation' Parent Cor&oration will have a (asis in the Su(sidiar) Cor&oration &ro&ert) re%eived for the (onds of A) @!7!. 9) @47'777. C) @177'777. :) none of the a(ove Answer: 9 E5&lanation: 9) Parent ta1es a %arr)over (asis from Su(sidiar) Cor&oration*s (oo1s for the &ro&ert) it re%eives in %an%ellation of the (onds
Page Ref.: C: !13B E5am&le C: !#/

") Santa Fe Cor&oration ado&ts a &lan of liquidation late in the %urrent ta5 )ear in whi%h it e5&e%ts to earn @177'777 &rofits from its o&erating a%tivities. Santa Fe*s o&erating a%tivities are dis%ontinued (efore the end of the )ear. Pursuant to the liquidation' it distri(utes assets' whi%h result in the re%ognition of @/7'777 of ordinar) losses. Santa Fe also distri(utes assets that have a&&re%iated in value' whi%h result in the re%ognition of @/7'777 of ordinar) gains. 2enerall)' Santa Fe Cor&oration should distri(ute A) the @/7'777 of ordinar) loss &ro&ert) in the %urrent )ear and the @/7'777 of ordinar) gain &ro&ert) ne5t )ear. 9) (oth the ordinar) loss and gain &ro&erties this )ear. C) (oth the ordinar) losses and gains &ro&erties ne5t )ear. :) the @/7'777 of ordinar) gain &ro&ert) in the %urrent )ear and the @/7'777 of ordinar) loss &ro&ert) ne5t )ear. Answer: A
Page Ref.: C: !13B E5am&le C: !#"

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.) Parent Cor&oration owns 47> of Sam Cor&oration*s single %lass of sto%1. ,his )ear Parent Cor&oration &ur%hases for %ash the remaining /7> of Sam Cor&oration*s sto%1 from four individual investors &ursuant to a tender offer. A &lan of liquidation is a&&roved () Sam Cor&oration*s shareholders during the last month of this )ear and Sam Cor&oration*s assets are distri(uted () )ear!end to Parent Cor&oration in e5%hange for all of Sam*s outstanding sto%1. Parent Cor&oration should A) not re%ogni+e an) gains and losses on the redem&tion. 9) re%ogni+e gains and losses on the redem&tion. C) re%ogni+e gains (ut not losses on the redem&tion. :) re%ogni+e losses (ut not gains on the redem&tion. Answer: A
Page Ref.: C: !16B E5am&le C: !#.

) A liquidation must (e re&orted to the $nternal Revenue Servi%e on Form 6 A) within 7 da)s of the ado&tion of a &lan of liquidation. 9) that is filed with the national $RS offi%e. C) whether the shareholders* reali+ed gain is re%ogni+ed or not. :) () the shareholders. Answer: C
Page Ref.: C: !#7

4) $f a liquidating su(sidiar) %or&oration &rimaril) has loss &ro&ert) to distri(ute' the &arent %or&oration should A) follow Se%. //# rules. 9) avoid Se%. //# rules. C) follow Se%. //# rules (ut avoid Se%. //4. :) none of the a(ove Answer: 9
Page Ref.: C: !#7

3) $dentif) whi%h of the following statements is false. A) A %or&oration must file an information return with the $nternal Revenue Servi%e within thirt) da)s of ado&ting a resolution to liquidate. 9) ,he ado&tion of a formal &lan of liquidation %an &rovide additional (enefits under ta5 laws to the %or&oration and its shareholders. C) A &lan of liquidation must (e redu%ed to writing in order to (e a%%e&ted () the $nternal Revenue Servi%e. :) ,he ado&tion of a &lan of liquidation &ermits a &arent %or&oration a three )ear time &eriod to %arr) out the %om&lete liquidation of its su(sidiar). Answer: C
Page Ref.: C: !#1

6) A Se%. //# liquidation requires a %om&lete statement (e filed with the distri(utee*s ta5 return A) when a liquidating distri(ution is re%eived. 9) when the liquidation &lan is ado&ted. C) when the liquidation is %om&iled. :) no statement is required with the return. Answer: A
Page Ref.: C: !#1

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47) A &lan of liquidation must (e A) written. 9) authori+ed () shareholder resolution. C) a formal &lan. :) %om&leted in one )ear. Answer: 9
Page Ref.: C: !#1

41) La1e Cor&oration distri(utes a (uilding used in its (usiness to Sand) in e5%hange for all of her La1e sto%1. Sand)*s (asis in her sto%1 is @/7'777 and the &ro&ert) she re%eives has a @67'777 F=A. As &art of the distri(ution Sand) assumes a lia(ilit) asso%iated with the &ro&ert) of @ .'777. ,he &ro&ert)*s (asis &rior to the liquidating distri(ution was @#.'777. <hat are the ta5 %onsequen%es of the distri(ution to Sand)8 ,o La1e Cor&oration8 Answer: Sand) will re%ogni+e a @.'777 %a&ital loss on the distri(ution JD@67'777 !@ .'777) ! @/7'777L. ,he (asis of the (uilding to Sand) will (e @67'777. ,he holding &eriod for the (uilding (egins on the da) after the distri(ution. ,he @67'777 F=A of the assets is redu%ed () the @ .'777 lia(ilit) assumed in determining the amount of the distri(ution to Sand). La1e Cor&oration will re%ogni+e a @ .'777 JD@#.'777 net F=A of assets K @ .'777 release from lia(ilities) ! @#.'777 ad0usted (asisL Se%. 1#/1 gain on the distri(ution. Some of the gain ma) (e ordinar) in%ome under Se%. #61 Dsee Cha&ter C/).
Page Ref.: C: !.

4#) -nder the general liquidation rules Fansas Cor&oration is liquidated' with Sam ,o&e1a re%eiving @#7'777 in %ash &lus other &ro&ert) having a @#"'777 F=A. Sam ,o&e1a*s (asis in his Fansas sto%1 is @/#'777. <hat is Sam ,o&e1a*s amount reali+ed and gain re%ogni+ed on the liquidation8 Answer: Sam ,o&e1a*s amount reali+ed is @""'777 D@#"'777 K @#7'777). Iis re%ogni+ed gain on the liquidation is @3'777 D@""'777 ! @/#'777).
Page Ref.: C: !.B E5am&le C: !/

4/) -nder the general liquidation rules =issouri Cor&oration is liquidated' with ?efferson re%eiving @.'777 in %ash &lus other &ro&ert) having a @ '777 F=A and assuming a @#'777 mortgage on the &ro&ert). ?efferson*s (asis in his =issouri sto%1 is @3'777. <hat is ?efferson*s amount reali+ed and gain or loss re%ogni+ed on the liquidation8 Answer: ?efferson*s amount reali+ed is @6'777 D@.'777 K @ '777 ! @#'777). Iis re%ogni+ed gain on the liquidation is @1'777 D@6'777 ! @3'777).
Page Ref.: C: !.B E5am&le C: !"

4") Al(ert re%eives a liquidating distri(ution from 2lidden Cor&oration as &art of a %om&lete redem&tion of its sto%1. Al(ert re%eives %ash of @.'777 and other &ro&ert) with an ad0usted (asis of @ '777 and a F=A of @17'777. Al(ert*s (asis in the 2lidden sto%1 surrendered is @3'777. Iow mu%h gain does he re%ogni+e8 Answer: Cash @ .'777 Plus: F=A of other &ro&ert) re%eived 17'777 Amount reali+ed @1.'777 =inus: 9asis of sto%1 D 3'777) Re%ogni+ed gain @ 4'777
Page Ref.: C: !.

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4.) =ar) re%eives a liquidating distri(ution from Snell Cor&oration as &art of a redem&tion of all of its sto%1. =ar)*s (asis in the Snell sto%1 is @17'777. $n e5%hange for her sto%1' =ar) re%eives &ro&ert) with an @3'777 (asis and a @1.'777 F=A that is su(0e%t to a @/'777 mortgage. =ar) also re%eives %ash of @.'777. <hat is =ar)*s re%ogni+ed gain8 Answer: F=A of &ro&ert) re%eived @1.'777 Plus: Cash .'777 =inus: =ortgage assumed D /'777) Amount reali+ed @14'777 =inus: 9asis of sto%1 D17'777) Re%ogni+ed gain @ 4'777
Page Ref.: C: !.B E5am&le C: !"

4 ) ?ohn and ?une' hus(and and wife' have owned Ru() Cor&oration for a num(er of )ears. ,heir (asis in the Ru() sto%1' whi%h the) own 0ointl)' is @#77'777. ,he Ru() sto%1 is Se%. 1#"" sto%1. Ru() Cor&oration liquidates' and ?ohn and ?une re%eive the following from the %or&oration: a%%ounts re%eiva(le' @/7'777 F=A' a %ar' @#1'777 F=A' offi%e furniture' @11'777 F=A' and @#.'777 in %ash. <hat are the amount and %hara%ter of their gain or loss8 Answer: @/7'777 K @#1'777 K @11'777 K @#.'777 M @34'777 total distri(ution @34'777 ! @#77'777 M D@11/'777) re%ogni+ed lossB @177'777 ordinar) loss under Se%. 1#"" and @1/'777 long!term %a&ital loss. ,he Se%. 1#"" loss %eiling is @177'777 for a married %ou&le filing a 0oint return' there() %ausing the remaining @1/'777 to (e a long!term %a&ital loss.
Page Ref.: C: !.' C: !

44) Charlene and :ennis ea%h own .7> of 9rewster Cor&oration and have owned it for five )ears. ,he ad0usted (ases of their 9rewster sto%1 are @37'777 and @"7'777 res&e%tivel). 9rewster Cor&oration liquidates and distri(utes @ 7'777 to Charlene in e5%hange for her sto%1. $t distri(utes a &ar%el of land with a @1"7'777 F=A whi%h is su(0e%t to a @67'777 mortgage to :ennis in e5%hange for his sto%1. :ennis assumes the mortgage and also re%eives @17'777 in %ash. a. <hat are the %hara%ter and amount of ea%h shareholder*s gain or loss8 (. <hat is ea%h shareholder*s (asis in the &ro&ert) re%eived in the liquidation8 Answer: a. Charlene: @ 7'777 @37'777 M @#7'777 long!term %a&ital loss :ennis: JD@1"7'777 ! @67'777) K @17'777L @"7'777 M @#7'777 long!term %a&ital gain. Iere' the lia(ilit) redu%es the amount reali+ed. (. Charlene' @ 7'777 %ashB :ennis' @1"7'777 (asis for land' and @17'777 %ash.
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43) ?a%1 Cor&oration is owned 4.> () Sherri and #.> () =ar1. Sherri and =ar1 have @1#.'777 and @.7'777 (ases in their sto%1' res&e%tivel). ?a%1 Cor&oration ado&ts a &lan of liquidation on =ar%h 1. Hn A&ril 1#' Sherri re%eives the following &ro&ert) as a liquidating distri(ution: %ash of @/7'777' land' @1#.' 777 F=A' and 1.7 shares of 2reen Cor&oration sto%1' @/7'777 F=A. ,he land is su(0e%t to a @#7'777 mortgage. Hn the same date' =ar1 re%eives @17'777 F=A of 2reen sto%1 D.7 shares) and %ash of @".'777 as a liquidating distri(ution. ,he land has a (asis of @.7'777 and the sto%1 has a (asis of @47'777 in ?a%1 Cor&oration*s hands. 9oth are %a&ital assets to ?a%1 Cor&oration and have (een held for a num(er of )ears. a. <hat are the amount and %hara%ter of ?a%1 Cor&oration*s re%ogni+ed gain or loss on the liquidating distri(utions8 (. <hat are the amount and %hara%ter of Sherri and =ar1*s re%ogni+ed gains or losses8 %. <hat are the (ases of the land and sto%1 to Sherri and =ar18 Answer: a. Land: D@17.'777 net F=A K @#7'777 lia(ilities) @.7'777 M @4.'777 long!term %a&ital gain. Sto%1: @"7'777 @47'777 M @/7'777 reali+ed long!term %a&ital loss. ?a%1 re%ogni+es the entire loss (e%ause the sto%1 is not disqualified &ro&ert) and is distri(uted in the same &ro&ortion D#.> for =ar1 and 4.> for Sherri) as =ar1 and Sherri*s sto%1holdings. (. Sherri: D@/7'777 K @1#.'777 K @/7'777 @1.'777 lia(ilities) @1#.'777 M @".'777 %a&ital gain. =ar1: D@17'777 K @".'777) @.7'777 M @.'777 %a&ital gain. %. Sherri: land' @1#.'777B and sto%1' @/7'777. =ar1: sto%1' @17'777.
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46) Iow is the gainEloss %al%ulated if a shareholder has a%quired sto%1 at different times and at var)ing &ri%es8 Answer: A shareholder who has &ur%hased (lo%1s of sto%1 at different times and &ri%es must %al%ulate the gain or loss on ea%h (lo%1 se&aratel). $t is &ossi(le to have (oth gains and losses e5isting in the same liquidating distri(ution and to for the gains and losses to have different %hara%ters.
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37) S&e%ialt) Cor&oration distri(utes land to one of its shareholders' Sam' as &art of a &lan of liquidation. ,he land' whi%h was used in S&e%ialt)*s (usiness' has an ad0usted (asis of @.7'777 and a F=A of @1/7'777 on the date of distri(ution. Sam*s (asis in S&e%ialt) Cor&oration sto%1 is @177'777. <hat is the amount and %hara%ter of the gainEloss re%ogni+ed () S&e%ialt) Cor&oration8 <hat is the amount and %hara%ter of the gainEloss re%ogni+ed () Sam8 Answer: S&e%ialt) re%ogni+es an @37'777 D@1/7'777 ! @.7'777) Se%. 1#/1 gain. Sam re%ogni+es a @/7'777 D@1/7'777 ! @177'777) %a&ital gain.
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31) <hat event determines when a %ash or a%%rual method of a%%ounting ta5&a)er re&orts a liquidating distri(ution8 Answer: A shareholder who uses the a%%rual method of a%%ounting re&orts the gain or loss using a%%rual %on%e&ts Di. e. ' the gain or loss is re%ogni+ed when all the events have o%%urred that fi5 the amount of the liquidating distri(ution and when the shareholders are entitled to re%eive the distri(ution u&on surrender of their shares). A shareholder who uses the %ash method of a%%ounting re&orts the gain when he or she has a%tual or %onstru%tive re%ei&t of the liquidating distri(ution.
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3#) -nder $llinois Cor&oration*s &lan of liquidation' the %or&oration distri(utes land to one of its shareholders' S&ringer. ,he land' whi%h is used in $llinois* trade or (usiness' has a @#7'777 ad0usted (asis and a @ 7'777 F=A on the distri(ution date. <hat are the ta5 %onsequen%es of this distri(ution to $llinois and S&ringer8 Answer: $llinois Cor&oration re%ogni+es a @"7'777 D@ 7'777 ! @#7'777) Se%. 1#/1 gain when it ma1es the liquidating distri(ution. S&ringer re%ogni+es a %a&ital gain to the e5tent that the land*s F=A e5%eeds his (asis in the $llinois sto%1. S&ringer*s (asis for the land is its @ 7'777 F=A.
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3/) Parent Cor&oration owns 177> of the sto%1 of Su(sidiar) Cor&oration. ,he ad0usted (asis of its sto%1 investment is @177'777. A &lan of liquidation is ado&ted. Su(sidiar) distri(utes to Parent assets with a @/#.'777F=A and a @#4.'777 ad0usted (asis. Su(sidiar) also distri(utes lia(ilities in the amount of @"7'777. Su(sidiar) has a @1.7'777 ENP (alan%e. a. <hat are the amount and %hara%ter of Su(sidiar) Cor&oration*s re%ogni+ed gain or loss on the distri(ution8 (. <hat are the amount and %hara%ter of Parent Cor&oration*s re%ogni+ed gain or loss on the redem&tion of the Su(sidiar) sto%18 %. <hat (asis does Parent ta1e in the assets8 d. <hat ha&&ens to &arent Cor&oration*s (asis in the Su(sidiar) sto%1 and to Su(sidiar)*s ta5 attri(utes8 Answer: a. @/#.'777 ! @#4.'777 M @.7'777 reali+ed gain' (ut no re%ogni+ed gain DSe%. //4). (. @/#.'777 ! @"7'777 lia(ilities ! @177'777 M @13.'777 reali+ed gain' (ut no re%ogni+ed gain DSe%. //#). %. @#4.'777 %arr)over (asis. d. ,he (asis for the Parent sto%1 disa&&ears and is re&la%ed () the (asis of ea%h of the individual assets. Su(sidiar)*s ENP (alan%e %arries over to Parent.
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3") Parent Cor&oration owns 37> of the sto%1 of an insolvent su(sidiar) %or&oration. Ai% owns the remaining #7> of the sto%1. ,he %ourts determine the su(sidiar) to (e (an1ru&t' and the shareholders re%eive nothing for their investment. Iow do the) re&ort their losses8 Answer: ,he liquidation will not qualif) for nonre%ognition treatment under Se%. //#' (e%ause no liquidating distri(ution was made to the %or&orate shareholder. Parent Cor&oration re%ogni+es an ordinar) loss for its investment in Su(sidiar) Cor&oration under the s&e%ial Se%. 1 .Dg)D/) worthless se%urit) rules. Ai% re%ogni+es a %a&ital loss to the e5tent of his investment under the Se%. //1 general liquidation rules. Ai% ma) re%ogni+e an ordinar) loss under the Se%. 1#"" rules if its requirements are satisfied.
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3.) <hat (asis do (oth the &arent and minorit) shareholders ta1e in the assets re%eived in a Se%. //# liquidation8 Answer: Sin%e the &arent re%ogni+es no gain or loss in the transa%tion' it ta1es a %arr)over (asis. Sin%e the minorit) shareholders have a ta5a(le transa%tion' therefore' the) ta1e a F=A (asis for the assets re%eived in the transa%tion.
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3 ) <h) should a %or&oration that is 177> owned () another %or&oration (e treated differentl) when it liquidates than a %or&oration that is 177> owned () an individual8 Answer: A %or&oration that is 177> owned () another %or&oration %an file a %onsolidated ta5 return. As a result' the &arent and its su(sidiar) are treated as a single entit). ,his result is the same as if the su(sidiar) were one of a num(er of divisions of a single %or&oration. An e5tension of the single entit) %on%e&t is that a su(sidiar) %or&oration %an (e liquidated ta5 free into its &arent %or&oration. An individual and his %or&oration are treated as two se&arate ta5 entities. As se&arate entities' nonliquidating distri(utions are ta5a(le. ,he same &rin%i&le a&&lies to liquidating distri(utions.
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34) <hat attri(utes of a %ontrolled su(sidiar) %or&oration are %arried over to the &arent when the su(sidiar) is liquidated8 Answer: CHL %arr)overs' earnings and &rofits' %a&ital loss %arr)overs' and the general (usiness and other ta5 %redit %arr)overs are %arried over to the &arent when a %ontrolled su(sidiar) is liquidated. ,he %arr)over amount is determined as of the %lose of the da) on whi%h the distri(ution of all the su(sidiar)*s %or&oration*s &ro&ert) is %om&leted.
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33) ?a%1 has a (asis of @/ '777 in his 1'777 shares of A%orn Cor&oration sto%1 Da %a&ital asset). ,he sto%1 was a%quired three )ears ago. Ie re%eives the following distri(utions as &art of a &lan of liquidation of A%orn Cor&oration :ate Amount =ar%h /1 of #776 @17'777 ?ul) 1. of #776 17'777 Covem(er 1. of #776 17'777 ?anuar) 1. of #717 17'777 <hat is the amount and %hara%ter of the gain or loss that ?a%1 will re%ogni+e during #7768 :uring #7178 Answer: 9e%ause ?a%1*s @/ '777 (asis has not (een re%overed () the end of #776' ?a%1 will have no re%ogni+ed gain in #776. Iis unre%overed (asis at the end of #776 )ear is @ '777 D@/ '777 ! @/7'777). Ie will re%ogni+e a @"'777 gain in #717 D@17'777 ! @ '777). ,he gain will (e a long!term %a&ital gain.
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36) Penn)' a %ash (asis ta5&a)er re&orted a @1.'777 long!term %a&ital gain on the e5%hange of her =idwest Cor&oration sto%1 when the %or&oration liquidated in #776. =idwest su(sequentl) lost a lawsuit and Penn) &aid an additional @/'777 in #711 as her &art of the settlement. <hat are the ta5 %onsequen%es to Penn) in #776 of the @/'777 additional &a)ment she made8 Answer: ,he @/'777 that she &aid &ersonall) is treated in #711 as a long!term %a&ital loss.
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67) Cew Oor1 Cor&oration ado&ts a &lan of liquidation on =ar%h 1. and shortl) thereafter sells a &ar%el of land on whi%h it reali+es a @1.'777 gain De5%luding the effe%ts of a @#'777 sales %ommission). Cew Oor1 &a)s its legal %ounsel @.77 to draft the &lan of liquidation. All of Cew Oor1*s remaining &ro&erties are distri(uted to its shareholders on Se&tem(er 1.. <hat are the ta5 %onsequen%es to Cew Oor1 on the land sale8 Answer: Cew Oor1 has a re%ogni+ed gain of @1/'777 D@1.'777 ! @#'777) and a @.77 liquidation e5&ense for legal %ounsel on its %urrent )ear in%ome ta5 return.
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61) Are liquidation and dissolution the same8 E5&lain )our answer. Answer: Liquidation status %ontinues from the time the &lan of liquidation has (een formall) or informall) ado&ted until the %or&oration %eases to (e a going %on%ern or until it has divested itself of all its &ro&ert). :issolution is a legal term that im&lies that the %or&oration has surrendered the %harter it originall) re%eived from the state. A %or&oration generall) ma) %om&lete its liquidation &rior to undergoing dissolution. :issolution ma) never o%%ur if the %or&oration retains its %harter to &rote%t its %or&orate name from (eing a%quired () another &art).
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6#) E5&lain the differen%e in ta5 treatment (etween a &artial liquidation and a %om&lete liquidation. Answer: A %om&lete liquidation is defined () Reg. Se%. 1. //##D%) as one or a series of distri(utions made () a liquidating %or&oration that %om&letel) %an%els or redeems all of its sto%1 in a%%ordan%e with a &lan of liquidation. A &artial liquidation is defined () Se%. /7#De) as a distri(ution that D1) is not essentiall) equivalent to a dividend Dwhen determined at the %or&orate level rather than at the shareholder level) and D#) is &ursuant to a &lan of liquidation and o%%urs within the ta5 )ear in whi%h the &lan is ado&ted or within the su%%eeding ta5 )ear. 2enerall)' a &artial liquidation involves the %or&oration either %easing to %ondu%t a trade or (usiness Dwhile still %ontinuing to %ondu%t a se%ond trade or (usiness) or %ontra%ting its (usiness a%tivities. $n either %ase' the %or&oration remains in e5isten%e after the &artiall) liquidating distri(ution. A %om&lete liquidation is ta5ed under Code Se%s. //1 and // . A &artial liquidation is ta5ed under Code Se%s. /7#D() and /11. ,he %om&lete liquidation is ta5ed to the e5tent the shareholder re%ogni+es a gain or loss' whi%h is %om&uted () %om&aring the F=A of the &ro&ert) re%eived to the ad0usted (asis of the sto%1 redeemed. <hen the shareholder re%eives a series of liquidating distri(utions' the distri(ution is ta5ed on%e the F=A of the &ro&ert) re%eived e5%eeds the ad0usted (asis of the sto%1 held. All (asis is re%overed first (efore the shareholder re%ogni+es an) gain. A &artial liquidation results in e5%hange treatment for a non%or&orate shareholder under Se%. /7#D()D"). A %or&orate shareholder is eligi(le for e5%hange treatment onl) if the distri(ution qualifies as an e5%hange under the sto%1 redem&tion rules of Se%s. /7#D()D1)!D()D/). ,he shareholder re%ogni+es a loss onl) when he or she re%eives the final liquidating distri(ution.
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6/) -nder what %ir%umstan%es does a liquidating %or&oration not re%ogni+e gain or loss when ma1ing a distri(ution8 Answer: A liquidating %or&oration does not re%ogni+e gain or loss under four %ir%umstan%es. ,hese are: 1. Liquidation of a su(sidiar) %or&oration ! ,he liquidating %or&oration re%ogni+es no gain or loss on liquidating distri(utions made to a &arent %or&oration who owns at least 37> of the su(sidiar)*s sto%1. #. :istri(utions to minorit) shareholders ! ,he liquidating %or&oration re%ogni+es gain (ut not loss on liquidating distri(utions made to minorit) shareholders when the Se%. //# nonre%ognition rules a&&l) to the &arent %or&oration. /. :istri(utions to related &ersons ! Loss re%ognition is disallowed when the liquidating %or&oration ma1es a distri(ution to a related &erson' as defined in Se%. # 4D()' if D1) the distri(ution is not &ro rata or D#) the &ro&ert) distri(uted is disqualified &ro&ert). :isqualified &ro&ert) is &ro&ert) a%quired () the %or&oration in a Se%. /.1 ta5!free formation or as a %a&ital %ontri(ution during the five!)ear &eriod ending on the distri(ution date or &ro&ert) having an ad0usted (asis that %arries over from a disqualified &ro&ert). ". Sales having a ta5!avoidan%e &ur&ose ! Loss re%ognition is restri%ted where &ro&ert) is transferred to the %or&oration in a Se%. /.1 transa%tion or %a&ital %ontri(ution after a date two )ears (efore the date that the %or&oration ado&ts a &lan of %om&lete liquidation. ,a5 avoidan%e is inferred in these situations unless the %or&oration uses the &ro&ert) in its trade or (usiness. A less!often en%ountered situation involves distri(utions or sales of a su(sidiar) %or&oration*s sto%1. A %or&oration %an ele%t under Se%. // De) to treat the sale' e5%hange' or distri(ution of a su(sidiar)*s sto%1 as a dis&osition of all the su(sidiar)*s assets' resulting in no gain or loss (eing re%ogni+ed on the sale' e5%hange' or distri(ution of the sto%1.
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6") $n a Se%. //# liquidation %an a su(sidiar) %or&oration re%ogni+e losses on distri(utions to either the &arent %or&oration or minorit) shareholders8 Answer: Co. Se%tion //# liquidations are an e5%e&tion to the general rule that losses are re%ogni+ed () the liquidating %or&oration. Losses are not re%ogni+ed on distri(utions to either the &arent %or&orations or the minorit) shareholders.
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6.) $n a Se%. //# liquidation what (ases do (oth the &arent and minorit) shareholders ta1e in the assets re%eived8 Answer: 9e%ause no gainEloss is re%ogni+ed () the &arent %or&oration' the &arent %or&oration ta1es a %arr)over (asis in its assets. Iowever' sin%e the minorit) shareholders are involved in a ta5a(le e5%hange' the minorit) shareholders ta1e a F=A (asis in their assets.
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6 ) <hat are the differen%es' if an)' in the ta5 rules a&&l)ing to distri(utions made to a &arent %or&oration and a minorit) shareholder when a %ontrolled %or&oration liquidates8 Answer: Shareholders re%eiving liquidating distri(utions generall) re%ogni+e gain or loss under Se%. //1 on the e5%hange of their sto%1 interest. A s&e%ial rule a&&lies to the &arent %or&oration when a %ontrolled su(sidiar) %or&oration is liquidated. ,he &arent %or&oration D37> distri(utee) re%ogni+es neither gain nor loss when it re%eives a liquidating distri(ution DSe%. //#). A minorit) shareholder on the other hand re%ogni+es gain or loss when re%eiving the distri(ution under the general Se%. //1 rules. ,wo e5%e&tions to the general Se%. // gain or loss re%ognition rules a&&l) to &ro&ert) distri(utions made () a %ontrolled su(sidiar) %or&oration. First' under Se%. //4 the su(sidiar) %or&oration does not re%ogni+e gain or loss when it ma1es a liquidating distri(ution to an 37> distri(utee %or&oration. Se%ond' under Se%. // Dd)D/) the su(sidiar) %or&oration re%ogni+es gain D(ut not loss) when it ma1es a liquidating distri(ution to a minorit) shareholder.
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64) <hat are the ta5 %onsequen%es of a %ash!method shareholder' su(sequent to a liquidation' if o(ligated to &a) a %ontingent lia(ilit) of the liquidated %or&oration8 Answer: Co amendment is made to the &rior )ear*s ta5 return. ,he additional &a)ment results in a loss re%ogni+ed in the )ear of &a)ment. ,he %hara%ter of the loss is de&endent on the nature of the gain or loss re%ogni+ed () the shareholder in the )ear of liquidation.
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63) <hat is the $RS*s &osition regarding whether a liquidating transa%tion will (e %onsidered o&en or %losed8 Answer: ,he $RS &osition is that the o&en transa%tion method ma) (e used onl) in unusual %ir%umstan%es. ,he $RS &refers the %losed transa%tion alternative. $n a %losed transa%tion' gain or loss is determined (ased on the F=A of the &ro&ert) distri(uted on the distri(ution date. ,his F=A amount (e%omes the &ro&ert)*s (asis. At the time the &ro&ert) is sold' %olle%ted' or its value is definitel) determined' gain or loss is %om&uted () %om&aring the &ro&ert)*s value at that time to its ad0usted (asis.
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66) <hat are the ta5 %onsequen%es to Parent Cor&oration when Parent Cor&oration' whi%h owns 4.> of Su(sidiar) Cor&oration*s single %lass of sto%1' &ur%hases for %ash the remaining #.> of the Su(sidiar) sto%1 from three individual shareholders &ursuant to a tender offer. ,hree months later as &art of an a&&roved &lan of liquidation' Su(sidiar)*s assets all distri(uted to Parent Cor&oration in e5%hange for all of Su(sidiar)*s outstanding sto%18 Answer: Parent Cor&oration re%ogni+es no gain or loss on the redem&tion of its Su(sidiar) sto%1 (e%ause all of the Se%. //# requirements have (een satisfied &rior to the ado&tion of the &lan of liquidation.
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177) <hat are the ta5 %onsequen%es to Parent Cor&oration' Su(sidiar) Cor&oration' and a Su(sidiar) Cor&oration shareholder' =elisa' for the following set of fa%ts. Parent Cor&oration owns 37> of Su(sidiar) Cor&oration*s sto%1. =elisa owns the remaining #7> of the Su(sidiar) sto%1. Parent and =elisa*s sto%1 have ad0usted (ases of @177'777 and @#.'777' res&e%tivel)' for their Su(sidiar) sto%1. Su(sidiar) distri(utes land having a @1#.'777 ad0usted (asis and a @#77'777 F=A to Parent and @.7'777 in %ash to =elisa. Answer: Parent re%ogni+es no gain on the liquidation and ta1es a @1#.'777 (asis in the land. Su(sidiar) re%ogni+es no gain or loss on the distri(ution of the land or the %ash' =elisa re%ogni+es a @#.'777 D@.7'777 ! @#.'777) %a&ital gain on the re%ei&t of the mone).
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171) 9lue(ird Cor&oration owns and o&erates (usses and has de%ided to liquidate its o&erations. Ai%tor' who owns 37> of the %om&an)*s sto%1' will re%eive all of the (usses' re&air &arts inventor)' and all tools and equi&ment. Ie &lans to start a (us %om&an) in another town. Penn)' who owns #7> of the sto%1' wants nothing to do with the new (us 25 Copyright 2011 Pearson Education, Inc.

(usiness and will re%eive a %ash distri(ution. 9lue(ird will in%ur a(out @#7'777 of e5&enses in %onne%tion with the liquidation. <hat ta5 issues should Ai%tor' Penn)' and 9lue(ird %onsider with res&e%t to the liquidation8 Answer: Penn) and Ai%tor should %onsider the following ta5 issues: P <hat gain or loss does 9lue(ird re%ogni+e on the two distri(utions8 P :oes 9lue(ird have to file a %or&orate ta5 return for the &ortion of the final ta5 )ear that it is in e5isten%e8 $f so' what in%ome and e5&enses are in%luded in the return8 P Can 9lue(ird dedu%t the liquidation e5&enses on its final ta5 return8 P <hat is the amount and %hara%ter of the gain or loss that Penn) and Ai%tor re%ogni+e u&on surrendering their 9lue(ird sto%18 P <hat (asis does Ai%tor ta1e for the non%ash assets that he re%eives8 P <hat ha&&ens to 9lue(ird*s ta5 attri(utes8 9lue(ird Cor&oration will need to re%ogni+e an) gain reali+ed on the distri(ution of the 9lue(ird %ars' su&&ort vehi%les' re&air &arts inventor)' tools' and equi&ment. 9lue(ird re%ogni+es no loss on the dis&osition of these items (e%ause the) are distri(uted to a related &art) DAi%tor owns 37> of 9lue(ird). Penn) re%ogni+es no gain on the distri(ution (e%ause she re%eives onl) %ash. Ai%tor and Penn) will need to determine their reali+ed and re%ogni+ed gains on the liquidation. 9lue(ird Cor&oration %an dedu%t the liquidation e5&enses in its final ta5 return. An) CHLs in%urred in the final )ear %an (e %arried (a%1 to the two &re%eding ta5 )ears. A su(stantial %ost ma) (e in%urred in liquidating the %or&oration. Perha&s Ai%tor should %onsider (u)ing Penn)*s sto%1 and 1ee& o&erating 9lue(ird Cor&oration in the new %it). ,his wa) the liquidation ta5 De. g. ' on %or&orate and shareholder level gains) will (e avoided.
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17#) Chi& and :ale are ea%h .7> owners of ,ree Cor&oration' a holding %om&an). ,he) have ea%h held their sto%1 sin%e the %om&an) was formed five )ears ago. ,ree*s mone) is invested almost entirel) in sto%1s' (onds' rental real estate' and land. All of the sto%1s are traded on the Cew Oor1 Sto%1 E5%hange e5%e&t for 1'777 shares of Conifer Cor&oration sto%1. Conifer is &rivatel) held () .7 individuals. Last )ear' Conifer re&orted a(out @# million in net in%ome. :uring a meeting with Chi& and :ale' )ou dis%over that the) &lan to liquidate ,ree Cor&oration as soon as &ossi(le to avoid the &ersonal holding %om&an) ta5. <hat ta5 issues should Chi& and :ale %onsider with res&e%t to this liquidation8 Answer: Chi& and :ale should %onsider the following ta5 issues: P Can the &ersonal holding %om&an) ta5 (e avoided () %hanging the investmentEo&erating de%isions of ,ree Cor&oration8 P <hat gain or loss does ,ree Cor&oration re%ogni+e if a liquidation o%%urs8 P <hat gain or loss do Chi& and :ale re%ogni+e if ,ree Cor&oration is liquidated8 P $s it &ossi(le for the o&en transa%tion do%trine to a&&l) to the liquidation of ,ree Cor&oration due to an ina(ilit) to value the Conifer sto%18 P Can the &ersonal holding %om&an) ta5 (e avoided () having ,ree Cor&oration ma1e an S ele%tion8 P <hat ta5 in%rease will o%%ur if Chi& and :ale &ersonall) own the &ro&ert) %urrentl) held () ,ree Cor&oration8 ,ree Cor&oration should determine whether the &ersonal holding %om&an) DPIC) ta5 %ould (e avoided () in%reasing the &ortion of ,ree*s in%ome earned from rental real estate a%tivities to &ermit the rental in%ome to (e e5%luded from the &ersonal holding %om&an) in%ome DPIC$). ,his te%hnique ma) require that ,ree shift asset %om&osition from sto%1s and (onds to real estate. $f a liquidation o%%urs' an a&&raisal of the Conifer sto%1 will (e needed. ,he $RS is unli1el) to &ermit the o&en transa%tion do%trine to a&&l) to the ,ree Cor&oration liquidation merel) (e%ause mar1et quotations for Conifer sto%1 are la%1ing.
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17/) Parent Cor&oration' whi%h o&erates an ele%tri% utilit)' %reated a 177> owned %or&oration' Su(sidiar) that (uilt and managed an offi%e (uilding. Assume the two %or&orations have filed se&arate ta5 returns for a num(er of )ears. ,he utilit) o%%u&ied two floors of the offi%e (uilding' and Su(sidiar) offered the other ten floors for lease. Hnl) #.> of the total rental s&a%e was leased (e%ause of the high %rime rate in the area surrounding the (uilding. Rental in%ome was insuffi%ient to %over the mortgage &a)ments' and Su(sidiar) filed for (an1ru&t%) (e%ause of the &oor &ros&e%ts. Su(sidiar)*s assets were ta1en over () the mortgage lender. Parent lost its entire @.77'777 investment. At the time Su(sidiar) was liquidated' another @177'777 of de(ts remained un&aid for the general %reditors' whi%h in%luded a @/.'777 a%%ount &a)a(le to Parent. <hat ta5 issues should Parent and Su(sidiar) %onsider with res&e%t to the (an1ru&t%) and liquidation of Su(sidiar)8 Answer: ,he managements of Parent and Su(sidiar) should %onsider the following ta5 issues: P <hat gain or loss does Parent Cor&oration re%ogni+e on the transfer of its remaining &ro&ert) to the mortgage lender8 P :oes Su(sidiar) Cor&oration have to re%ogni+e %an%ellation of inde(tedness in%ome from not having re&aid its de(ts8 P :oes Su(sidiar) Cor&oration have to file a %or&orate ta5 return for the &ortion of the final ta5 )ear that it is in e5isten%e8 $f so' what in%ome and e5&enses are in%luded in the return8 P Can Su(sidiar) Cor&oration dedu%t the liquidation e5&enses on its final ta5 return. P <hat is the amount and %hara%ter of the loss that Parent Cor&oration re%ogni+es u&on surrendering its Su(sidiar) sto%18 -&on not (eing re&aid for the o&en a%%ount inde(tedness8 P <hat ha&&ens to Su(sidiar) Cor&oration*s ta5 attri(utes8 9e%ause Parent Cor&oration re%eived nothing for its investment in Su(sidiar) Cor&oration' it %an %laim a worthless se%urit) loss for the @.77'777 investment. ,his loss should (e an ordinar) loss under Se%. 1 .Dg)D/). Su(sidiar)*s @/.'777 de(t to Parent should (e dedu%ti(le as a (ad de(t under Se%. 1 . 9e%ause %or&orations do not have a distin%tion (etween (usiness and non(usiness de(ts' Su(sidiar) %an %laim an ordinar) loss dedu%tion for the (ad de(t in its final ta5 return.
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