Ch 6

Question 0

Special rules: parent corporation liquidates, how does the parent corporation shareholder treat the liquidation?

Holding period

Answer 0

Parent corporation (shareholder) recognizes no gain or loss

Basis and Holding period carries over to parent

Question 1

General rules: corporate liquidation treatment by share holder

Holding period?

Answer 1

Shareholder Recognizes capital gain/loss equal to excess money
Received and FMV of non cash property over adjusted basis of
Stock

Holding period is day after liquidation date

Question 2

3 questions asked for determining the tax consequences of liquidation to each of the liquidating corporation’s shareholders

Answer 2

1 what are the amount timing and character of the shareholder’s
Recognized gain or loss?
2 what is the shareholder’s adjusted basis of each property
received?
3 when does the holding period begin for each property received
By the shareholder?

Question 3

2 questions must be answered to determine the tax consequences of liquidation transaction for the liquidating corporation?

Answer 3

1 what are the amount and character of the corp’s recognized
Gain or loss?

2 what happen’s to the corporation’s tax attributes upon
Liquidation?

Question 4

Under general rules: when a liquidating corporation recognizes gain or loss on distribution of property to its shareholders, what is it treated the same as?

Answer 4

Recognized gain or loss is same as what corp. would recognize
Had it sold distributed property to shareholders

Question 5

If the liquidating corporation is an 80% controlled subsidiary of the parent corporations, what special tax rules apply?

Answer 5

The liquidating corporation recognizes no gain or loss

Question 6

When does liquidation status exist?

Answer 6

When corporation ceases to be a going concern

It activities are to wind up the business, distribute the remaining
Property and pay off debts

Question 7

How is a distribution taxed before a corporation adopts a plan of liquidation?

Answer 7

Taxed as dividend or capital gain

Question 8

Dissolution

Answer 8

Legal term implies the corporation has surrendered charter it
Received from the state

Question 9

Dissolution may never occur if the corporation…

Answer 9

Retains its charter to protect the corporate name from being
acquired by another party

Question 10

Retention of a nominal amount of assets

Answer 10

Minimum amount required to preserve the corporation’s interest
Under state law

Question 11

General rule: amount of gain or loss recognized in distribution to shareholder

Answer 11

Shareholders recognized gain or loss =

Money +FMV non cash property -adjusted basis of stock (liquidation)

Question 12

General rule: in liquidation to shareholders what is the adjusted basis of property received?

When does the holding period begin?

Answer 12

FMV of the property

Holding period begins day after liquidation date

Question 13

Liquidation to shareholders: what is the character of the gain or loss recognized?

Answer 13

Long term or short term capital loss

Limited ordinary loss treatment available

Question 14

Controlled subsidiary corporation rule: what is the amount of gain or loss recognized in a liquidation to shareholders?

Answer 14

Parent corporation recognizes no gain or loss when an 80%
Controlled subsidiary corporation liquidates into the parent
Corporation

Question 15

Controlled subsidiary corporation rule: what is the adjusted basis of property received in liquidation?

What is the holding period?

Answer 15

Carryover basis for property received form subsidiary corporation

Includes subsidiary corp’s holding period for the assets

Question 16

When stock is acquired, gain/loss must be calculated for…

Answer 16

Each separate time a block of shares is acquired

Question 17

Character of recognized gain or loss

2 exceptions

Answer 17

Usually capital in character

1 loss recognized by shareholder on sec. 1244 stock is an
Ordinary loss within limits
2 loss recognized by corp. shareholder on worthlessness of
Controlled subsidiary’s stock is an ordinary loss under sec. 165

Question 18

Basis and holding period of property received in liquidation

Answer 18

Basis is FMV on distribution date

Holding period starts day after distribution date

Question 19

Liquidating corporations: loss recognition

Answer 19

Liquidating corporations can recognize losses when it distributes property that declines in value

Question 20

Nonliquidating and liquidating distributions: corporation

Shareholder

Answer 20

Produce similar results for the corporation

Liquidating is treated as a capital gain for shareholder, if it were
nonliquidating it has stronger chance of dividend treatment

Question 21

The liquidating subsidiary corporation recognizes no gain/loss
Upon distribution of property (when sec. 332 applies to the parent corp.) to…

When is a gain recognized

Answer 21

It’s minority shareholders

When sec. 336d rules apply to the parent corp.

Question 22

When sec. 332 rules apply, tax attributes of the subsidiary corporation…

Answer 22

Carry over to the parent corporation

Question 23

The general rule: treatment of liquidating corporation’s tax attributes

Answer 23

Tax attributes disappear when liquidation is completed

Question 24

Related party rule: amount and character of gain, loss or income recognized

Answer 24

Liquidating subsidiary recognizes no loss upon distribution unless
Corp. distributes property ratably to all shareholders

And liquidating corp. did not acquire property in sec. 351 transaction
Or as capital contribution in 5 years proceeding distribution

Question 25

Tax avoidance rule: amount and character of gain, loss or income recognized

Answer 25

Liquidating subsidiary recognizes no loss from sale, exchange
Or distribution of property

If property acquired in sec. 351 transaction or as capital
Contribution with principal purpose of loss recognition

Question 26

Liabilities assumed by shareholders in liquidation, how does a corporation recognize a gain?

Answer 26

FMV of distributed property can’t be less than liabilities assumed
By shareholders in a liquidation, when corp. recognizes gain

Ex. $2.7 million = liability, $2.4 million = adjusted basis, $2.2 million = FMV. corporations recognized gain = $.3 million = 2.7-2.4

Question 27

Section 332 and section 337 provide that the parent corporation recognizes…

What does this section only apply to?

Answer 27

No gain or loss when a controlled subsidiary corp. liquidates into
It’s parent corp

Only applies to parent corporation, not minority interest shareholders

Question 28

All 3 requirements that must be met for liquidation to qualify for sec. 332 no recognition rules

Answer 28

1 parent corp. must own 80% voting power and value of all
classes of stock
2 property distribution must be complete cancellation or
redemption of all subsidiary corp.’s stock
3 distribution of property must occur within single tax year or
Be 1 of series of distributions within 3 years

Question 29

If conditions for sec. 332 aren’t met, how is the liquidation taxed?

Answer 29

Taxed under general liquidation rules

Question 30

Status of liquidation

Answer 30

Necessary status for corporation to have so its distributions
Are treated as liquidations

Question 31

Timing of distributions

Answer 31

Either within tax year

or a formal plan is needed if liquidate over 3 year period

Question 32

Parent corporation that receives a liquidating distribution from an insolvent subsidiary

Answer 32

Section 332 does not apply, because the parent doesn’t distribute
Any assets to redeem the subsidiary’s stock

Ordinary loss is recognized

Question 33

3 situations where section 332 does not apply

Answer 33

1 parent corporation, receives liquidating distribution from
insolvent subsidiary
2 minority shareholders that receive liquidating distributions
3 parent corporation that receives payment to satisfy subsidiary’s
Indebtedness to parent

Question 34

Insolvent subsidiary

Answer 34

It’s liabilities exceed FMV of its assets

Question 35

Treatment of minority shareholders that receive liquidating distributions

Answer 35

Taxed under general liquidation rules sec. 331

Minority shareholder recognizes gain or loss that’s capital

Question 36

Parents basis in property received in liquidating distribution, 3 things

Answer 36

Same as subsidiary’s basis prior to distribution

The parent’s basis for it’s stock investment in the subsidiary
Corporation is ignored when determining basis of distributed
Property

and disappears once parent surrenders stock in
Subsidiary

Question 37

Minority shareholder’s basis in property received in liquidating distribution

Answer 37

FMV basis in assets received

Question 38

Parent corporation that assumes property with depreciation recapture potential in liquidation

Answer 38

Recapture occurs when parent sells or exchanges property

Question 39

Liquidating distributions to minority shareholders, tax treatment of liquidating corporation

Answer 39

Liquidating corporation must recognize gain, but can’t recognize
Loss

Same treatment as nonliquidating distribution

Question 40

Tax attributes of the liquidating corporation

Answer 40

Disappear when liquidation is completed under general rules

Carryover when controlled subsidiary is liquidated into its
Parent under sec. 332

Question 41

4 items in tax attribute carryovers

Answer 41

1 NOL carryovers
2 Earnings and profits
3 capital loss carryovers
4 general business and other tax credit carryovers

Question 42

When a subsidiary corporation makes a liquidating transfer to a parent, what are the tax consequences?

Answer 42

None, The subsidiary corporation recognizes no gain or loss

Question 43

4 special shareholder reporting rules that apply to liquidation transactions

Answer 43

1 partially liquidating distributions
2 subsequent assessment
3 open vs. closed transactions
4 installment obligations

Question 44

Partially liquidating distributions 3 things

Answer 44

Treated as complete liquidation

Shareholder’s basis recovered first, then recognition of gain
Once basis fully recovered

Loss can’t be recognized until final liquidating distribution received

Question 45

Subsequent assessments, define, what is their tax treatment?

Answer 45

At some date after liquidation, shareholders may be required to
Pay a contingent liability of corp.,

or liability not anticipated at time of liquidating distribution

2) treated as long term capital loss

Question 46

Open transaction doctrine

Answer 46

Shareholder’s gain or loss from liquidation isn’t determined
Until assets that can’t be valued are sold, collected or able
To be valued

Any assets that can’t be valued are assigned a zero value

Question 47

Installment obligations

Answer 47

Shareholders who received installment obligations as part of
Their liquidation distribution ordinarily report FMV of obligation

As part of consideration in calculating recognized gain/loss

Question 48

Liquidating corporation: expenses of liquidation

Answer 48

Corp. can deduct these expenses

Include attorneys’ and accountants’ fees, costs incurred in
Drafting liquidation plan

Question 49

Liquidating corporation: expenses associated with selling its property

Answer 49

Offset against sales proceeds

Question 50

Net operating loss: S election

Answer 50

If the liquidating corp. makes an S election in the liquidation yr.
NOL created that year can pass through to shareholders

Question 51

When a corporation retires a security at an amount different from the shareholder’s adjusted basis for the obligation…

Answer 51

The shareholder recognizes a gain or loss for the difference

Question 52

The parent corporation recognizes a gain or loss upon receipt of property…

Answer 52

In payment of subsidiary corp. indebtedness if payment differs
From parent’s basis in the debt