Prentice hall's federal taxation test bank chapter 6
Prentice Hall's Federal Taxation 2013 Corporations, 26e (Pope)
Chapter C6 Corporate Liquidating Distributions
1) Liquidation and dissolution have the same legal meaning.
Answer: FALSE
Page Ref.: C:6-4
Objective: 1
2) In a complete liquidation, a liability assumed by a shareholder reduces the shareholder's amount realized.
Answer: TRUE
Page Ref.: C:6-5
Objective: 2
3) In general, a noncorporate shareholder that receives a distribution in complete liquidation of the liquidating corporation recognizes his or her entire realized gain as a capital gain.
Answer: TRUE
Page Ref.: C:6-6
Objective: 2
4) The adjusted basis of property received in a complete liquidation is its fair market value on the distribution date.
Answer: TRUE
Page Ref.: C:6-6
Objective: 2
5) Generally, a corporation recognizes a gain, but not a loss, on a liquidating distribution.
Answer: FALSE
Page Ref.: C:6-6
Objective: 2
6) Section 336 prevents recognition of a loss when making a pro rata distribution of property to a related person.
Answer: FALSE
Page Ref.: C:6-8
Objective: 2
7) The liquidation of a subsidiary corporation must be completed within one tax year to receive nonrecognition treatment.
Answer: FALSE
Page Ref.: C:6-11
Objective: 3
8) A subsidiary recognizes no gain or loss on a distribution to a parent corporation owning more the majority of the subsidiary's stock in a complete liquidation.
Answer: FALSE
Page Ref.: C:6-13
Objective: 3
9) A subsidiary must recognize depreciation recapture income when the subsidiary is liquidated into the parent.
Answer: FALSE
Page Ref.: C:6-14
Objective: 3
10) Liquidating expenses are generally deducted as ordinary and necessary business expenses. Answer: TRUE
Page Ref.: C:6-16
Objective: 2
11) A corporation is required to file Form 966 within 30 days after the adoption of a plan of liquidation. Answer: TRUE
Page Ref.: C:6-20
Objective: 7
12) A plan of liquidation must be reduced to writing in order to be accepted by the Internal Revenue Service.
Answer: FALSE
Page Ref.: C:6-21
Objective: 7
13) In a complete liquidation of a corporation, which of the following is false?
A) All stock of the liquidating corporation is canceled or redeemed.
B) The corporation ceases to be a going concern.
C) The corporation divests itself of substantially all its properties.
D) The liquidation of a corporation means it has undergone dissolution.
Answer: D
Page Ref.: C:6-3 and C:6-4
Objective: 1
14) Identify which of the following statements is false.
A) The tax attributes of the liquidating corporation carry over to the shareholders when the liquidation is conducted under the general liquidation rules.
B) Baker Corporation was formed in a Sec. 351 exchange three years ago by Emil, Fred, and George who own equal stock interests. The corporation can be liquidated tax-free under the special liquidation rules of Secs. 332 and 337.
C) The terms "liquidation" and "dissolution" are synonymous.
D) All of the above are false.
Answer: D
Page Ref.: C:6-3 through C:6-10
Objective: 2
15) When a corporation liquidates, it performs three activities. What is the general order of these activities in a plan of liquidation?
A) pay debts, distribute property to shareholders, and wind up its affairs
B) wind up its affairs, distribute property to shareholders, pay debts
C) pay debts, wind up its affairs, and distribute property to shareholders
D) wind up its affairs, pay debts, and distribute property to shareholders
Answer: D
Page Ref.: C:6-4
Objective: 1
16) Moya Corporation adopted a plan of liquidation last year. All but a nominal amount of Moya's assets are distributed to its shareholders within the year. Which of the following statements is not true?
A) The liquidation of Moya Corporation means the corporation has undergone dissolution.
B) Moya Corporation retains its state charter.
C) Moya Corporation's existence is preserved.
D) Moya Corporation has been liquidated for tax purposes.
Answer: A
Page Ref.: C:6-4
Objective: 1
17) Liquidation rules generally are applied the same to the following organizations except for
A) subsidiary corporations (80% controlled).
B) C corporations.
C) S corporations.
D) subsidiary corporations (less than 80% controlled).
Answer: A
Page Ref.: C:6-5
Objective: 2
18) Riverwalk Corporation is liquidated, with Juan receiving $5,000 in money and other property having
a $6,000 FMV. Juan's basis in his Riverwalk stock is $8,000. Upon liquidation, Juan must recognize a gain of
A) 0.
B) $2,000.
C) $3,000.
D) $11,000.
Answer: C
Page Ref.: C:6-5; Example C:6-3
Objective: 2
19) Riverwalk Corporation is liquidated, with Juan receiving $5,000 in money, other property having a $6,000 FMV, and a $1,000 mortgage on the property. Juan's basis in his River walk stock is $8,000. Upon liquidation, Juan must recognize a gain of
A) 0.
B) $2,000.
C) $3,000.
D) $11,000.
Answer: B
Page Ref.: C:6-5; Example C:6-4
Objective: 2
20) Texas Corporation is undergoing a complete liquidation and distributes land to Robert, one of its shareholders, in exchange for all of Robert's stock. The land has a basis of $300,000 and an FMV of $400,000 on Texas Corporation's books and is subject to a $325,000 liability. Robert assumes the liability on the property. Robert's basis in his Texas Corporation stock is $100,000. What is the amount of gain or loss recognized by Robert on the distribution?
A) $175,000 gain
B) $25,000 gain
C) No gain or loss is recognized.
D) $25,000 loss
Answer: D
Page Ref.: C:6-5
Objective: 2
21) Robot Corporation is liquidated, with Marty receiving property having an adjusted basis of $60,000 and an FMV of $90,000. The property is subject to a $80,000 mortgage, which Marty assumes. Marty's basis in the Robot stock surrendered is $50,000. Marty must recognize
A) a $40,000 loss.
B) no gain or loss.
C) a $60,000 gain.
D) none of the above
Answer: A
Page Ref.: C:6-5
Objective: 2
22) Identify which of the following statements is true.
A) The method of accounting used by shareholders involved in a complete liquidation is relevant when determining the year in which the shareholder's gain or loss should be reported.
B) An accrual method of accounting taxpayer recognizes his/her realized gain on a corporate liquidation when there has been actual or constructive receipt of the liquidating distribution(s).
C) If a shareholder assumes or acquires liabilities of the liquidating corporation, the amount of these liabilities does not reduce the amount realized by the shareholder.
D) All of the above are false.
Answer: A
Page Ref.: C:6-6
Objective: 4
23) Property received in a corporate liquidation by a noncorporate shareholder has
A) a basis equal to its basis on the liquidating corporation's books increased by any gain recognized by the shareholder upon receipt of the property. Its holding period includes the holding period of the shareholder's stock.
B) a basis equal to its basis on the liquidating corporation's books increased by any gain recognized by the shareholder upon receipt of the property. Its holding period commences on the day after the distribution date.
C) a basis equal to its FMV reduced by any liabilities assumed by the shareholder. Its holding period commences on the day after the distribution date.
D) a basis equal to its FMV. Its holding period commences on the day after the distribution date. Answer: D
Page Ref.: C:6-6
Objective: 2
24) Identify which of the following statements is true.
A) In general, a noncorporate shareholder that receives a distribution in complete liquidation of the liquidating corporation recognizes his or her entire realized gain as a capital gain.
B) The basis for nonmoney property received by a noncorporate shareholder as part of a liquidating distribution is the same as its basis on the books of the liquidating corporation.
C) The liquidating corporation does not recognize gains and losses when making a distribution of nonmoney property.
D) All of the above are false.
Answer: A
Page Ref.: C:6-6
Objective: 2
25) Identify which of the following statements is true.
A) A loss recognized by a shareholder upon complete liquidation of a corporation may not qualify for ordinary loss treatment if the stock is Sec. 1244 stock.
B) The loss that is recognized by an individual shareholder on the liquidation of a corporation is a capital loss, up to certain limits, if the stock is Sec. 1244 stock.
C) The loss recognized by a corporate shareholder on the worthlessness of the controlled subsidiary's stock is an ordinary loss.
D) All of the above are false.
Answer: C
Page Ref.: C:6-6
Objective: 3
26) Under a plan of complete liquidation, Coast Corporation distributes land with a $300,000 adjusted basis and a $400,000 FMV to William, a 25% shareholder. William has a $200,000 basis in his Coast stock. The land is inventory in the hands of Coast Corporation. Coast Corporation must recognize
A) no gain.
B) $100,000 of ordinary income.
C) $100,000 of long-term capital gain.
D) $200,000 of ordinary income.
Answer: B
Page Ref.: C:6-6
Objective: 2
27) Identify which of the following statements is true.
A) With limited exceptions, a loss can be recognized by a liquidating corporation when it makes a liquidating distribution of property that has declined in value.
B) When computing the corporate-level gain on a liquidating distribution, the FMV of the property cannot exceed the liability assumed or acquired by the shareholder.
C) The FMV of property distributed by a liquidating corporation can be less than the amount of the liability assumed or acquired by the shareholder.
D) All of the above are false.
Answer: A
Page Ref.: C:6-6
Objective: 2
28) Under a plan of complete liquidation, Key Corporation distributes land (not a disqualified property) with an adjusted basis of $410,000 and an FMV of $300,000 for all Sharon's stock. Sharon's basis in her 5% interest in the Key stock is $250,000. Find Sharon's basis in the land and Key Corporation's recognized gain or loss.
Answer: A
Page Ref.: C:6-5 through C:6-7
Objective: 2
29) Barnett Corporation owns an office building that cost $900,000. Barnett has taken $600,000 of depreciation on the building. The property is subject to a $600,000 mortgage. The office building has a current FMV of $400,000. Barnett Corporation is liquidated and the office building is distributed to a single individual shareholder who assumes the mortgage. Barnett Corporation must recognize
A) no gain or loss.
B) a $100,000 gain.
C) a $300,000 gain.
D) none of the above
Answer: C
Explanation: C) The building is deemed to be worth at least the amount of the liability that is assumed. The corporation's basis in the building is $300,000 (cost less depreciation) and the liability assumed is $600,000; therefore, Barnett's gain is $300,000.
Page Ref.: C:6-7
Objective: 2
30) Identify which of the following statements is true.
A) A liquidating distribution of property other than a disqualified property that is made ratably to all shareholders (based on their stockholdings) will permit the recognition of loss on the portion of the distribution that is made to a related person.
B) A subsidiary corporation can recognize losses on distributions to either the parent corporation or minority shareholders in a Sec. 332 liquidation.
C) Section 336 prevents recognition of a loss when making a pro rata distribution of property to a related person.
D) All of the above are false.
Answer: A
Page Ref.: C:6-8
Objective: 2
31) Identify which of the following statements is true.
A) The loss realized on the sale of a property is disallowed when such property was received by a corporation as a contribution of capital in a transaction having as its principal purpose the recognition of loss pursuant to the corporation's subsequent liquidation later in the same taxable year.
B) Losses claimed in a tax return filed before the adoption of the plan of liquidation are not restricted by Sec. 336(d)(2).
C) Properties acquired by a liquidating corporation as a capital contribution occurring within three years of the adoption of a plan of liquidation are generally presumed to have a tax avoidance motive.
D) All of the above are false.
Answer: A
Page Ref.: C:6-8
Objective: 2
32) The stock of Cooper Corporation is 70% owned by Carole and 30% owned by Carole's brother, Chris. During 2005, Chris transferred property (basis of $100,000 and FMV of $120,000) as a contribution to the capital of Cooper. During February 2006, Cooper adopted a plan of liquidation and subsequently made a pro rata distribution of the property back to Carole and Chris. At the time of the liquidation, the property had an FMV of $80,000. What amount of loss can be recognized by Cooper on the distribution of property?
A) $0
B) $6,000
C) $12,000
D) $20,000
Answer: A
Explanation: A) No loss can be recognized because Carole and Chris (brother and sister) each constructively own 100% of the corporation and the property was acquired in a carryover-basis transaction within the five-year period preceding the liquidating distribution.
Page Ref.: C:6-8
Objective: 2
33) Last year, Toby made a capital contribution of a pretzel maker having a $2,000 adjusted basis and a $200 FMV to Keke Corporation in exchange for additional stock. This year, Keke Corporation adopted a plan of liquidation. Prior to the adoption of the liquidation plan, Keke had not used the pretzel maker in connection with the conduct of its trade or business. Which of the following statements is true?
A) Keke Corporation may recognize a loss of $1,800.
B) Keke Corporation may recognize a loss of $200.
C) Keke Corporation's basis for determining the loss will be $2,000.
D) Keke Corporation's basis for determining the loss will be $200.
Answer: D
Page Ref.: C:6-9; Example C:6-11
Objective: 2
34) Toby made a capital contribution of a pretzel maker having a $2,000 adjusted basis and a $200 FMV to Keke Corporation in exchange for additional stock last year. Later that same year, Keke sold the pretzel maker for $300. This year, Keke adopted a plan of liquidation. Previously, Keke had never used the pretzel maker in connection with the conduct of its trade or business. The sale was reported on Keke's current tax return. What reporting option does Keke Corporation not have because of its plan of liquidation?
A) File an amended tax return for the tax year in which the tax loss was originally claimed.
B) Recapture the loss on the tax return for the year the plan for liquidation was adopted.
C) Recognize a gain of $100 for the current year.
D) none of the above
Answer: C
Page Ref.: C:6-9; Example C:6-11
Objective: 2
35) Dexer Corporation is owned 70% by Amy and 30% by Brad. Dexer Corporation owns Eagle Corporation stock with a $50,000 adjusted basis and a $30,000 FMV. The stock is not disqualified property. As part of a complete liquidation, the Eagle Corporation stock is distributed to Amy. Amy's basis in her Dexer stock is $40,000. Dexer Corporation will recognize
A) no loss.
B) a $10,000 loss.
C) a $20,000 loss.
D) none of the above
Answer: A
Page Ref.: C:6-10
Objective: 2
36) Cowboy Corporation owns 90% of the single class of stock in Doggie Corporation. The other 10% is owned by Miguel, an individual. Cowboy's basis in its Doggie Corporation stock is $100,000 and Miguel's basis is $50,000. Doggie Corporation distributes property having an adjusted basis of $150,000 and an FMV of $500,000 to Cowboy Corporation, and $60,000 of money to Miguel as a liquidating distribution. Doggie and Cowboy Corporations must recognize gain of:
Answer: A
Explanation: A) The 90% stock ownership by Cowboy meets the Sec. 332 minimum stock ownership rules. Therefore, no gain or loss is recognized by the subsidiary corporation or the parent corporation. Page Ref.: C:6-10
Objective: 2
37) Parent Corporation owns 100% of the single class of stock of Subsidiary Corporation. Parent's basis in the Subsidiary stock is $500,000 when Parent completely liquidates Subsidiary Corporation within a single tax year. The Subsidiary Corporation assets have a $700,000 adjusted basis and an $800,000 FMV at liquidation. As a result of the liquidation, Parent must recognize a
A) $0 gain.
B) $200,000 gain.
C) $300,000 gain.
D) none of the above
Answer: A
Explanation: A) 100% ownership by Parent Corporation of Subsidiary's single class of stock meets the 80% minimum stock ownership requirement of Sec. 332 for nonrecognition of gain or loss.
Page Ref.: C:6-10
Objective: 3
38) Identify which of the following statements is true.
A) A parent corporation cannot liquidate a subsidiary corporation (having but a single class of stock) and avoid recognizing its realized gain unless the parent corporation owns at least 80% of the subsidiary's stock.
B) The liquidation of a subsidiary corporation must be completed within one tax year to receive nonrecognition treatment.
C) The provisions permitting a tax-free liquidation of a subsidiary corporation apply to both corporate and noncorporate shareholders of the subsidiary.
D) All of the above are false.
Answer: A
Page Ref.: C:6-10
Objective: 3
39) Carly owns 25% of Base Corporation's single class of stock and Premier Corporation owns the remaining 75%. Carly's basis in the Base stock is $200,000 and Premier Corporation's basis in the Base stock is $600,000. Carly receives property with a $175,000 adjusted basis and a $250,000 FMV and Premier Corporation receives property with a $600,000 adjusted basis and a $750,000 FMV in complete liquidation of Base Corporation. All of Base's cash is used to pay its liabilities. Which of following statements is correct concerning the tax effects of the liquidation?
A) Neither Carly nor Premier Corporation will recognize a gain.
B) Carly will recognize some gain but Premier Corporation will not recognize any gain.
C) Both Carly and Premier will recognize some gain.
D) Carly will not recognize any gain but Premier will recognize some gain.
Answer: C
Explanation: C) 75% stock ownership by Premier Corporation does not meet the 80% stock ownership minimum of Sec. 332 in order for nonrecognition of gain or loss to occur.
Page Ref.: C:6-10
Objective: 3
40) When a subsidiary corporation is liquidated into its parent corporation under a formal plan of liquidation, the distributions must take place within
A) a six-month period.
B) a 12-month period.
C) the current and next tax years.
D) the current and next three tax years.
Answer: D
Page Ref.: C:6-11
Objective: 3
41) Parent Corporation for ten years has owned all of the stock of Subsidiary Corporation, which manufactures widgets. Parent's basis in Subsidiary's stock is $500,000. Subsidiary Corporation is insolvent and has no assets to redeem any of the stock that Parent Corporation owns when it liquidates. Nearly all of Subsidiary's gross income during the past five years has come from nonpassive activities. Parent can recognize
A) a $500,000 short-term capital loss.
B) a $500,000 long-term capital loss.
C) a $500,000 ordinary loss.
D) a $500,000 bad debt deduction.
Answer: C
Page Ref.: C:6-12
Objective: 3
42) Ball Corporation owns 80% of Net Corporation's stock and Jack owns the remaining 20% of Net Corporation's stock. Ball's basis in the Net stock is $200,000 and Jack's basis in the Net stock is $100,000. Under a plan of complete liquidation, Ball Corporation receives property with an adjusted basis of $400,000 and an FMV of $800,000 and Jack receives property with an adjusted basis of $50,000 and an FMV of $200,000. Ball and Jack's recognized gains on the liquidation are:
Answer: B
Page Ref.: C:6-12; Example C:6-15
Objective: 2
43) Ball Corporation owns 80% of Net Corporation's stock and Jack owns the remaining 20% of Net Corporation's stock. Ball's basis in the Net stock is $200,000 and Jack's basis in the Net stock is $100,000. Under a plan of complete liquidation, Ball Corporation receives property with an adjusted basis of $400,000 and an FMV of $800,000 and Jack receives property with an adjusted basis of $50,000 and an FMV of $200,000. Ball and Jack's bases in the property received are:
Answer: B
Page Ref.: C:6-13; Example C:6-16
Objective: 2
44) Market Corporation owns 100% of Subsidiary Corporation's stock. Market Corporation completely liquidates Subsidiary Corporation, receiving land with a $400,000 adjusted basis and a $500,000 FMV in exchange for Subsidiary stock, which has a $300,000 adjusted basis. Market Corporation has a basis in the land of
A) $300,000.
B) $400,000.
C) $500,000.
D) none of the above
Answer: B
Explanation: B) Section 334(b)(1) provides for a carryover basis.
Page Ref.: C:6-13
Objective: 3
45) Dusty Corporation owns 90% of Palace Corporation's stock and Susan owns the remaining stock. Dusty Corporation's stock basis is $300,000 and Susan's stock basis is $20,000. Under a plan of complete liquidation, Dusty Corporation receives property with a $400,000 adjusted basis and a $540,000 FMV and Susan receives property with a $20,000 adjusted basis and a $60,000 FMV. The bases of the properties are:
Answer: C
Page Ref.: C:6-13
Objective: 2
46) Identify which of the following statements is false.
A) Minority shareholders involved in a Sec. 332 subsidiary liquidation must recognize a gain or loss under the Sec. 331 general liquidation rules.
B) The parent corporation takes a basis in property received when liquidating a subsidiary corporation in a Sec. 332 liquidation equal to its basis to the subsidiary corporation.
C) Section 332 is applicable to both the parent corporation and the minority shareholders if they exist.
D) Property received by a minority shareholder takes a basis equal to its fair market value.
Answer: C
Page Ref.: C:7-12
Objective: 3
47) Identify which of the following statements is false.
A) Liquidating distributions made to minority shareholders in the tax-free liquidation of a controlled subsidiary corporation are treated by the liquidating corporation in the same way as nonliquidating distributions.
B) Sec. 337(a) provides that the liquidating corporation recognizes no gain or loss on the distribution of property to the 80% distributee in a complete Sec. 332 liquidation.
C) The depreciation recapture provisions in Secs. 1245 and 1250 override the Sec. 337(a) nonrecognition rule if a controlled subsidiary corporation is liquidated into its parent corporation.
D) A corporation that distributes the stock of a subsidiary may elect to treat the distribution as a sale of the subsidiary's assets.
Answer: C
Page Ref.: C:6-14
Objective: 3
48) Lake City Corporation owns all the stock in Columbia Corporation. Pursuant to a plan of complete liquidation, Columbia distributes land having a $500,000 FMV and a $200,000 basis to Lake City. Columbia's gain with respect to the distribution will be
A) no gain recognized.
B) $200,000.
C) $300,000.
D) $500,000.
Answer: A
Page Ref.: C:6-12; Example C:6-15
Objective: 3
49) Lake City Corporation owns all of the stock in Columbia Corporation. Pursuant to a plan of complete liquidation, Columbia distributes land having a $500,000 FMV and a $200,000 basis to Lake City. Lake City's basis in the land will be
A) cannot be determined from the facts presented
B) 0.
C) $200,000.
D) $500,000.
Answer: C
Page Ref.: C:6-13; Example C:6-16
Objective: 3
50) The general rule for tax attributes of liquidating corporations is
A) they disappear when the liquidation is complete.
B) they carry over for five years.
C) they disappear only for controlled subsidiary corporations.
D) they carry over for an indefinite period of time.
Answer: A
Page Ref.: C:6-14
Objective: 1
51) Sandy, a cash method of accounting taxpayer, has a basis of $46,000 in her 500 shares of Newt Corporation stock. She receives the following distributions as part of Newt's plan of liquidation.
The amount of the final distribution is not known on December 31, 2007. What are the tax consequences of the distributions?
A) Sandy will recognize a loss of $4,500 in 2007 and a $1,500 loss in 2008.
B) Sandy will recognize the entire loss in 2007.
C) Sandy will recognize the entire loss in 2008.
D) None of the above is correct.
Answer: C
Page Ref.: C:6-16
Objective: 4
52) Prime Corporation liquidates its 85%-owned subsidiary Bass Corporation under the provisions of Secs. 332 and 337. Bass Corporation distributes land to its minority shareholder, John, who owns a 15% interest. The property received by John has a $55,000 FMV. The land was used in the Bass Corporation's business and has a $65,000 adjusted basis and is subject to a $10,000 liability, which is assumed by John. John's basis in his stock is $25,000. What gain or loss will John and Bass Corporation recognize on the distribution of the land?
Answer: B
Page Ref.: C:6-14; Example C:6-18
Objective: 3
53) Greg, a cash method of accounting taxpayer, owns 100 shares of Parker Corporation stock with a basis of $20,000. Greg receives two liquidating distributions of $8,000 on March 3 of last year, and $8,000 on August 8 of this year. The amount of the second distribution is not known until June 15 of this year. Greg recognizes
A) a gain of $8,000 last year and a loss of $12,000 this year.
B) a loss of $2,000 last year and a loss of $2,000 this year.
C) no loss last year and a $4,000 loss this year.
D) none of the above
Answer: C
Explanation: C) The shareholder basis is recovered first and the recognition of gain occurs only after the basis has been recovered in a series of partially liquidating distributions. No loss is generally recognized until the final liquidating distribution has been received.
Page Ref.: C:6-15; Example C:6-20
Objective: 4
54) Barbara owns 100 shares of Bond Corporation stock with a basis of $40,000. Barbara receives two liquidating distributions, including $16,000 paid last year and $20,000 paid in the current year. An additional distribution of an undetermined amount is expected next year. On last year's tax return, Barbara can recognize a loss of
A) $0.
B) $1,000.
C) $4,000.
D) $14,000.
Answer: A
Explanation: A) The shareholder's basis is recovered first and the recognition of gain occurs only after the basis has been recovered in a series of partially liquidating distributions.
Page Ref.: C:6-15; Example C:6-20
Objective: 4
55) Hope Corporation was liquidated four years ago. Teresa reported a $40,000 long-term capital gain due to the liquidation on her individual tax return. This year, Teresa pays $6,000 as part of the settlement of a lawsuit against Hope. Due to the $6,000 payment, Teresa recognizes a
A) $6,000 long-term capital loss.
B) $6,000 short-term capital loss.
C) $6,000 ordinary loss.
D) none of the above
Answer: A
Page Ref.: C:6-15; Example C:6-21
Objective: 4
56) Key Corporation distributes a patent with an indeterminable value to Gary as part of a plan of complete liquidation. In addition, Gary receives $40,000 cash and land with a $70,000 FMV and a $30,000 adjusted basis. Gary's basis in the Key stock (a capital asset) surrendered is $120,000. If Gary relies on the open transaction doctrine, at the liquidation date he must recognize a
A) $0 gain.
B) $10,000 capital loss.
C) $30,000 capital loss.
D) $70,000 capital gain.
Answer: A
Explanation: A) The liquidating distribution is an open transaction. No gain or loss is recognized since the amount received ($110,000) is less than Gary's $120,000 basis in his stock.
Page Ref.: C:6-16
Objective: 4
57) During 2007, Track Corporation distributes property to Cindy as part of a complete liquidation. Property included in the distribution is $30,000 in cash, land with a $40,000 adjusted basis and a $60,000 FMV, and a copyright without an ascertainable FMV and having a zero basis. The first payment to Cindy of $8,000 for use of the copyrighted property occurs in 2008. Cindy has a basis in the Track stock of $95,000 immediately preceding the liquidation. The minimum amount of gain that Cindy must recognize is a
A) $3,000 gain in 2008.
B) $0 gain in 2007.
C) $3,000 gain in 2007, which is reported on an amended current-year tax return that is filed in 2008.
D) none of the above.
Answer: B
Explanation: B) No gain is recognized since the copyright does not have an ascertainable FMV and Cindy can apparently rely on the open transaction doctrine to determine her gain or loss. Cindy has a $5,000 [($30,000 + $60,000) - $95,000] unrecovered basis immediately after the liquidation. The receipt of the first payment of $8,000 results in a $3,000 ($8,000 - $5,000) gain being recognized in the following year.
Page Ref.: C:6-16
Objective: 4
58) Identify which of the following statements is false.
A) An individual taxpayer, who is assessed an additional payment of money based on stock ownership in a corporation whose stock is redeemed in a complete liquidation, may recognize a capital loss to the extent of the additional assessment.
B) The open transaction doctrine defers the shareholder's gain or loss from a liquidation until the assets can be valued by sale or collection.
C) The open transaction doctrine as applied to complete corporate liquidations refers to the numerous planning alternatives available when liquidating a corporation.
D) The IRS asserts that the open transaction doctrine should be used only in extraordinary circumstances. Answer: C
Page Ref.: C:6-16
Objective: 4
59) Identify which of the following statements is true.
A) Upon liquidation, any capitalized expenditures unamortized at the time of liquidation should be deducted if they have no further value to the corporation.
B) Shareholders who receive an installment obligation as part of their liquidating distribution ordinarily report the FMV of their obligation as part of the consideration received to calculate the amount of recognized gain or loss.
C) A liquidating corporation treats expenses associated with selling its property as an offset against the sales proceeds.
D) All the above are true.
Answer: D
Page Ref.: C:6-16 and C:6-17
Objective: 4
60) Homewood Corporation adopts a plan of liquidation on June 15 and shortly thereafter sells a parcel of land on which it realizes a $50,000 gain (excluding the effects of a $5,000 sales commission). Homewood pays its legal counsel $2,000 to draft the plan of liquidation. The accountant fees for the liquidation are $1,000, which are also paid during the year. What is Homewood Corporation's realized gain on the sale of land and deductible liquidation expenses?
Answer: A
Page Ref.: C:6-16; Example C:6-22
Objective: 4
61) When a liquidating corporation pays off an unsecured debt obligation,
A) the corporation recognizes no gain or loss if it uses appreciated property.
B) the corporation recognizes no gain or loss if it uses cash.
C) the corporation recognizes any gains but not losses realized.
D) the corporation recognizes losses but not gains realized.
Answer: B
Page Ref.: C:6-17 and C:6-18
Objective: 5
62) Identify which of the following statements is true.
A) The Sec. 332 nonrecognition rules apply to the parent corporation when a subsidiary corporation transfers property to the parent corporation in payment of the subsidiary's debt obligation.
B) A subsidiary corporation is prevented from recognizing gain or loss when transferring property to its parent corporation in satisfaction of an indebtedness it owes to the parent corporation as part of its complete liquidation.
C) Nonrecognition of gain or loss rules apply to a subsidiary corporation when, pursuant to its complete liquidation, the subsidiary transfers property to a third-party creditor.
D) All of the above are false.
Answer: B
Page Ref.: C:6-17 and C:6-18
Objective: 5
63) Parent Corporation owns all of Subsidiary Corporation's stock. In addition, Parent Corporation owns $100,000 (face amount and basis) of Subsidiary Corporation's bonds. When Subsidiary Corporation is completely liquidated, it distributes property with a $70,000 adjusted basis and a $100,000 FMV to Parent Corporation in redemption of the Subsidiary Corporation bonds. Following the liquidation, Parent Corporation will have a basis in the Subsidiary Corporation property received for the bonds of
A) $0.
B) $70,000.
C) $100,000.
D) none of the above
Answer: B
Explanation: B) Parent takes a carryover basis from Subsidiary Corporation's books for the property it receives in cancellation of the bonds.
Page Ref.: C:6-18; Example C:6-23
Objective: 5