CHAPTER 20 CORPORATIONS: DISTRIBUTIONS IN COMPLETE

1. The stock in Crimson Corporation is owned by Angel and Melawi, who are unrelated. Angel owns 60% and Melawi owns 40% of the stock. All of Crimson Corporation’s assets were acquired by purchase. The following assets are to be distributed in complete liquidation of Crimson Corporation:

	Adjusted	Fair Market
Basis	Value
Cash	$300,000	$300,000
Inventory	110,000	100,000
Equipment	180,000	200,000
Land	460,000	400,000

a. What gain or loss, if any, would Crimson Corporation recognize if it distributes the cash, inventory, and equipment to Angel and the land to Melawi?

b. What gain or loss, if any, would Crimson Corporation recognize if it distributes the equipment and land to Angel and the cash and inventory to Melawi?

2. Mary and Jane, unrelated taxpayers, own Gray Corporation’s stock equally. One year before the complete liquidation of Gray, Mary transfers land (basis of $200,000, fair market value of $130,000) to Gray Corporation as a contribution to capital. Assume that Mary also contributed other property in the same transaction having a basis of $20,000 and fair market value of $100,000. In liquidation, Gray distributes the land to Jane. At the time of the liquidation, the land is worth $110,000.

a. How much loss, if any, may Gray Corporation recognize on the distribution of the land to Jane?

b. Assume that the transfer of land to Gray Corporation was made so that the corporation could subdivide the land and build residential housing. However, a subsequent deterioration of the housing market forced Gray Corporation to abandon its plans. What amount of loss may Gray Corporation recognize on the distribution of the land to Jane?

3. The stock of Tan Corporation (E & P of $1.5 million) is owned as follows: 90% by Egret Corporation (basis of

$900,000), and 10% by Zoe (basis of $70,000). Both shareholders acquired their shares in Tan more than six years ago. In the current year, Tan Corporation liquidates and distributes land (fair market value of $1.1 million, basis of $1.3 million) and equipment (fair market value of $700,000, basis of $410,000) to Egret Corporation, and securities (fair market value of $200,000, basis of $260,000) to Zoe. What are the tax consequences of these distributions to Egret, to Tan, and to Zoe?

4. After a complete liquidation has been adopted, Wren Corporation sells its only asset, unimproved land (basis of

$200,000) held as an investment. The land is sold to Seth (an unrelated party) for $500,000. Under the terms of the sale, Wren Corporation receives cash of $50,000 and Seth’s notes for the balance of $450,000. The notes are payable over the succeeding 5 years ($90,000 per year) and carry an appropriate rate of interest. Immediately after the sale, Wren Corporation distributes the cash and notes to Adam, the sole shareholder of Wren. Adam has an adjusted basis of $80,000 in the Wren stock. The installment notes have a value equal to their face amount of $450,000.

a. How will Wren Corporation be taxed on the distribution?

b. How will Adam be taxed on his receipt of the cash and notes?

5. On March 15, 2013, Blue Corporation purchased 10% of the Gold Corporation stock outstanding. Blue Corporation purchased an additional 40% of the stock in Gold on October 24, 2013, and an additional 25% on April 4, 2014. On July 23, 2014, Blue Corporation purchased the remaining 25% of Gold Corporation stock outstanding.

a. For purposes of the § 338 election, on what date does a qualified stock purchase occur?

b. What is the due date for making the § 338 election?

6. Cotinga Corporation is acquiring Petrel Corporation through a “Type C” reorganization by exchanging 20% of its voting stock and $50,000 for all of Petrel’s assets (value of $800,000 and basis of $600,000) and liabilities ($100,000). Jerrika owns 48% of Petrel (basis $270,000), and Allen owns the remaining 52% (basis $380,000). They exchange their stock in Petrel for their proportionate shares of the Cotinga stock and cash. What is the value of the Cotinga stock received by Jerrika and Allen? What are the amounts of gains/losses each recognizes due to the reorganization? What is Jerrika’s and Allen’s basis in the Cotinga stock?