CHAPTER 5—COMPLETE LIQUIDATIONS Key
1. It is necessary for a corporation to dissolve before a liquidation can be completed.
2. Shareholders generally treat the amounts received in a liquidation as amounts received in full payment of
their stock.
3. A shareholder reports a total gain or loss on a liquidation even if the stock was acquired at different times.
4. Shareholders can accelerate the recognition of loss on a complete liquidation by receiving payments in two or
more years.
5. Gains and losses on liquidation distributions received all in one year may be deferred over two or more years
using the cost recovery method.
6. When a shareholder receives an installment note attributable to a sale of property by a liquidating
corporation, receipt of the note is always treated as full payment for the stock for Federal income tax purposes.
7. As a general rule, shareholders calculate gains and losses on liquidations based on the full fair market value
of any installment notes received.
8. A shareholder can defer the recognition of gain on liquidation when an installment note is received, if the
note arose from the sale of all the corporation’s assets within the 12-month period starting with the adoption of
the plan of liquidation.
9. After the repeal of all rules based on the General Utilities doctrine, revised § 336 now provides that, as a
general rule, a corporation does not recognize any gains or losses when distributing its assets to its shareholders
in complete liquidation.
10. The treatment of distributions in liquidations differs from that in nonliquidating distributions in that the
corporation is always allowed to recognize loss on a liquidating distribution.
11. A parent corporation generally recognizes no gain or loss on property it receives upon the liquidation of a
subsidiary corporation.
12. In the liquidation of a subsidiary under § 332, gains and losses will be recognized on the distribution of
property to minority shareholders.
13. When a subsidiary is liquidated by its parent corporation, the basis of the assets transferred from the
subsidiary to the parent is determined by the amount of the parent’s investment in the subsidiary’s stock.
14. Even though the parent corporation in a § 332 liquidation uses the carryover basis of the subsidiary as its
basis in the assets received, the depreciation recapture rules apply to the subsidiary.
15. Section 338 eliminated the Kimbell-Diamond doctrine.
16. Section 338 permits a parent corporation to elect to treat the purchase of stock of a subsidiary as a purchase
of assets “to obtain the same basis that it would have obtained had it purchased the assets directly” (fair market
value). The subsidiary must liquidate when the parent elects § 338.
17. Assuming a proper election has been made under § 338, a subsidiary corporation determines its basis in
assets as equal to the price that the parent corporation paid for the subsidiary’s stock, adjusted by liabilities of
the subsidiary and its ownership percentage.
18. In most situations, a target subsidiary has some assets that have appreciated in value (i.e., fair market value
exceeds the asset’s basis), and other assets where the value is less than the asset’s basis. In such case, the
acquiring corporation, desiring the highest basis possible for the assets, might first purchase the appreciated
property, then purchase the subsidiary’s stock, and then liquidate the subsidiary under § 332. By so doing, the
acquiring corporation might violate the Code’s “consistency” provision.
19. The purchaser of a corporation with an NOL carryover should consider making a § 338 election.
20. Generally, by considering a sale of stock, a corporation avoids having the value of a business diminished
directly or indirectly by the corporate level tax.
21. J purchased 100 shares of C common stock in 2007 for $1,000. J purchased another 100 shares in 2012 for
$10,000. In the current year, C adopts a plan of liquidation and distributes $8,000 to J as the first installment
($4,000 for each block). J’s recognized gain or loss on the distribution is
22. K purchased all 100 shares of N Corporation in 2008 for $50,000. N Corporation adopts a plan of
liquidation on January 1, 2012. On May 1, 2012, N sells its only asset, land, for $10,000 cash and an installment
not with a face amount and fair market value of $90,000. On January 8, 2013, N distributes the cash and note t
K. On her 2012 tax return, K will report the following as gain or loss from the liquidation. (Assume n
collections on the installment note during 2012.)
23. K purchased all 100 shares of N Corporation in 2004 for $50,000. N Corporation adopts a plan of
liquidation on January 1, 2012. On May 1, 2012, N sells its only asset, land, for $10,000 cash and an installment
not with a face amount and fair market value of $90,000. On December 1, 2012, N distributes the cash and not
to K. On her 2012 tax return, K will report which of the following as gain from the liquidation? (Assume n
collections on the installment note during 2012.)
24. K purchased all 100 shares of N Corporation in 2005 for $50,000. N Corporation adopts a plan of
liquidation on January 1, 2012. On May 1, 2012, N sells its only asset, land, for $10,000 cash and an installment
not with a face amount and fair market value of $90,000. On December 1, 2012, N distributes the cash and not
to K. In 2013, K receives $9,000 from the installment note. How much gain must K report in 2013?
25. K purchased all 100 shares of N Corporation in 2008 for $50,000. N Corporation adopts a plan of
liquidation on January 1, 2012. On May 1, 2012, N sells its only asset, land, for $10,000 cash and an installment
not with a face amount and fair market value of $90,000. On December 1, 2012, N distributes the cash and not
to K. N’s basis in the land is $36,000. On its final return, N will report a gain from the note of
26. On January 15, 2012, the Board of Directors of K Corporation voted to adopt a plan of liquidation as of
February 1, 2012. On January 25, 2012, they sell land and realize a $400,000 loss. On February 15, 2012, they
sell a building acquired in 2003 and depreciated under ACRS at a $200,000 gain (total depreciation recapture
potential of $380,000). K distributes all of its assets to its shareholders on December 31, 2012.On K’ s final tax
return, it will report
27. R, an individual, purchased all the stock of T Corporation on January 1, 2003 for $20,000. On January 1,
2012, T adopts a plan of liquidation. On January 20, 2012, T sells land with a basis of $60,000 for $45,000. On
January 31, 2012, T distributes the $45,000 cash plus its only other asset, FIFO inventory with a basis o $40,000
and a fair market value of $48,000, to R. Which of the following statements is true?
28. Z Corporation, in complete liquidation, distributes its only asset, land, to its sole shareholder. The land has
basis of $40,000 and a fair market value of $55,000. The shareholder assumed Z’s liability of $60,000.Z
Corporation will report gain on the distribution of
29. L Corporation’s only assets are land and building. Their combined original cost is $1 million, basis is
$600,000, and current fair market value is $1.2 million. L elected the straight-line method of depreciation. L
distribute the land and building to its sole shareholder in complete liquidation. The amount of income that L
must report is
30. X is the sole shareholder of Z Shipping Corporation. In anticipation of the corporation’s liquidation, X in
2008 contributed an ancient wharf to the corporation with a built-in loss of $1 million (value $2 million, basis
$3 million). In 2012, Z distributed the wharf along with land purchased and held for business purpose by the
corporation worth $900,000 (basis $200,000). What is the amount of gain/loss recognized by Z?
31. The treatment of distributions in liquidation differs from that in nonliquidating distributions in that the
corporation is normally allowed to recognize loss on a liquidating distribution. To prevent abuse of this
privilege to circumvent the gain recognition rule, restrictions prohibit the liquidating corporation fro
recognizing losses on distributions to related parties if:
32. The parent T Corporation owned 80 percent of Company J’s stock as of February 2, 2012; on June 2, 2012,
liquidating distribution of all of Company J’s property was made to T Corporation in complete redemption of
the subsidiary’s stock in accordance with a formal plan. Which element of these proceedings was no required by
provisions of § 332 regarding liquidation of subsidiaries?
33. Z Corporation purchases 90 percent of B Corporation’s outstanding common stock for $1 million on
January 1, 2003. On June 15, 2012, B adopts a plan of liquidation and distributes assets with a fair market value
o $1.2 million and a basis of $900,000 to Z. B distributes assets with a fair market value of $133,333 and basis
of $90,000 to the minority shareholders. Which of the following is true?
34. X Corporation is owned by Y Corporation and T, an individual. Y owns 90 percent of X’s stock, and T own
the other 10 percent. X adopts a plan of liquidation and distributes land with a basis of $700,000 and a fair
market value of $900,000 to Y, and marketable securities with a basis of $40,000 and a fair market value o
$100,000 to T. X must report gain or loss of
35. R Corporation, a men’s clothing retailer, purchased all of the stock of L Corporation, a women’s clothing
retailer, for $200,000 as part of a plan to diversify. But L Corporation became insolvent, with liabilities o
$500,000 and assets of $350,000. R decided to liquidate L. R’s tax loss related to the liquidation is
36. A Corporation owns 90 percent of the outstanding stock of B Corporation; the remaining 10 percent i owned
by unrelated parties. In a liquidation pursuant to § 332, B distributed and transferred property to with a fair
market value of $80,000 (basis $30,000). In addition, B distributed and transferred property to the minority
shareholders worth $11,000 (basis $9,000). How much gain does B realize?
37. Q Corporation is a wholly owned subsidiary of P Corporation. P has an account receivable from Q in the
amount of $50,000. As a part of a complete liquidation, Q transfers property (fair market value of $50,000 and
basis of $30,000) to P in settlement of the debt. What is the amount of gain that Q should recognize?
38. Q Corporation had assets with a basis of $800,000 and no liabilities. P Corporation bought all the stock of Q
Corporation for $1 million. Three years later, when Q Corporation’s assets had shrunk to a basis of $600,000, P
Corporation liquidated Q Corporation in a tax-free liquidation under § 332. What is P Corporation’s basis in the
assets received from Q Corporation? (Assume that P Corporation’s basis in it assets not received from Q
Corporation at the time of liquidation of Q was $750,000.)
39. What are the provisions of § 338 for avoiding the abuses under Kimbell-Diamond?
40. Y Corporation purchases S stock as follows:
November 15, 2010
10 percent
February 12, 2011
5 percent
November 12, 2011
60 percent
December 28, 2011
10 percent
The last date that Y can purchase another 10 percent of S stock and still qualify for the § 338 election is
41. D Corporation purchased all of the stock of E Corporation for $1 million. E’s only asset is land with a basis
of $200,000. E had no liabilities. D elects § 338. D also liquidates E. E is deemed to have sold its land for fair
market value, and E must recognize a gain of $800,000. The tax liability resulting from the deemed sale is
$272,000 ($800,000 x 34%). What is D’s basis in the land?
42. X Corporation purchased 90 percent of Y Corporation on February 3 of the current year for $1.2 million an
made a § 338 election. The fair market value of Y Corporation’s assets is $1.3 million, and its basis i $900,000.
Select the correct statement.
43. The term grossed-up basis
44. Assets are grouped into five classes under provisions of § 338. The method of establishing the value of
Class V, or intangible, assets in the nature of goodwill or going concern value is
45. F Corporation purchases from an unrelated person 100 percent of the stock of G Corporation on April 20 o
the current year. Assume the purchase price, adjusted for all relevant items, is $200,000. G’s assets a acquisition
date are
Class
Basis
Fair Market Value
I Cash
$ 20,000
$ 20,000
III Accounts
receivable
40,000
40,000
IV Inventory
50,000
110,000
Total
$110,000
$170,000
Under provisions of § 338, the purchase price is first allocated to cash in the amount of $20,000. This leaves $180,000 to be allocated. As there are no
Class II assets, the allocation is to Class III and IV. How should the remainder be allocated?
46. When a new corporation is created from the old subsidiary under provisions of § 338, the new corporation
may
47. H Corporation purchased 55 percent of J Corporation’s stock on April 5, 2011 and the remaining 45 percent
on July 28, 2011. The time known as the consistency period under provisions of § 338 runs from April 5, 2010
through July 28, 2012. If H acquires any assets of J during this period, except in the ordinary course of
business,
48. From the following list identify the one item that does not describe one of the difficulties commonly
presented by asset sales as compared to stock sales.
49. From the buyer’s perspective, a sale of stock may be preferable to a sale of assets because
50. K Corporation is 100 percent owned by Seller, who has a basis in her stock of $10,000. K Corporation’s sol
asset is a waterbed factory worth $100,000 (basis $30,000). If Buyer purchases all the stock o K Corporation for
$100,000, Buyer will own a corporation that holds a waterbed factory with a basis in the factory of $30,000,
much less than the cost to Buyer. If Buyer is a corporation, a § 338 election could b made to obtain a step-up in
basis to $100,000 for the factory. The result would be
51. K Corporation is 100 percent owned by Seller, who has a basis in her stock of $10,000. K Corporation’s sol
asset is a waterbed factory worth $100,000 (basis $30,000). If Buyer purchases all the stock o K Corporation for
$100,000, Buyer will hold the waterbed factory with a basis in the factory of $30,000, much less than the cost to
Buyer. If Buyer is not a corporation, Buyer would
52. T Corporation purchased all of the stock of V Corporation last year for $1.2 million. V has a basis in it
assets of $1.7 million. T Corporation does not elect § 338. A year later, W Corporation indicates that I would
like to purchase the business of V for $1.4 million. Good tax planning dictates that T Corporation should
53. When the general liquidation provisions of § 331 apply, consideration should be given to the possibility o
minimizing tax obligations. Available planning options include
54. In assessing whether to use a § 338 election, considerations include