Taxation principles

Seminar on Taxes Current issues
Chapter 20
Answer to Question No 1:
In cases where the distribution is not pro rata and where the property mistrusted is not eligible property.
Answer to Question 3:
The built-in loss constraint refers to sales, transfers or distributions; it is one of the two essential “anti-stuffing” rules and price accounts with a fair market value less than the base value. The loss is passed to the corporation immediately after the liquidation of the corporation, typically within two years. Answer to Question 5:
A parent company shall not recognize any loss or benefit as a complaint to section 332 of the winding-up and shall take the form of a lawsuit. The property experiences a carryover period. Other tax attributes of subsidiary corporations are also applied to the parent corporation including carryover of business tax, E&P net operating loss and capital loss. In case of subsidiary stock, parent’s basis disappears.
Answer to question number 6:
Unlike section 331 that deals with the tax implications of the liquidating parent corporation, the rule 332 describes the liquidation of the subsidiary. The rule essence no need to recognize parent’s gain or loss in the liquidation of subsidiary property nor for the subsidiary corporation to report any gain or loss to the parent corporation that stems from the distribution of properties. Two conditions prevail regarding this:
1. In terms of voting power and value, the parent corporation must have 80% or more power,
2. Solvency of the subsidiary corporation,
3. Immediate liquidation, not exceeding three years form the tax-year closing, of subsidiary.
Answer to question number 7:
Pursuant to section 332, a subsidiary must recognize any gain but not loss in its distribution of property to any minority shareholder. Consequently, it must pay taxes as per prevailing rate. On the other hand, the minority shareholder is obliged to recognize both gain and loss in any property distribution from subsidiary corporation. The gain or loss must be reported in terms of the difference between fair market value of the received property and its basis in the subsidiary stock. The basis of the minority shareholder is determined by the market value of the property received on the date the property is distributed.
Answer to question number 8:
When a buyer corporation buys the stock of a target corporation under 338 election, the stock purchase for legal purposes becomes an asset purchase for tax purposes. Consequently, tax redemption is resulted in a stepped-up basis. The buyer can retain its property basis.
Answer to question number 9:
Section 338 allows the corporation to purchase stock and retain the basis of its assets. It further permits adjustment in the basis for the assets. Under section 338, if the corporation sold its assets, the transactions related to the sale will be subjected to double tax. Whereas, if the corporation cause liquidation for the target asset’s and then undergo for a sale is subjected to single tax.
Answer to question number 13:
a. A corporation can enjoy the recognition of gains and losses on liquidation distribution in a manner it would have enjoyed in case of sales at fair market value. Obviously, in this distribution, the gain of the Carrot corporation is $130,000 ($880,000 –$650,000).
b. The fair market value cannot be lower than the liability, in case the distributed property has any liability, the section 336 dictates. But in the case of liability is less than the FMV. Consequently, the gain of the Carrot corporation is the same to $130,000 ($880,000 –$650,000).
c. . The fair market value cannot be lower than the liability, in case the distributed property has any liability, the section 336 dictates. Therefore, the gain of the Carrot corporation is ($885,000 –$650,000) = 125,000
Answer to question number 14:
a. A liquidating corporation realizes its gain or loss in terms of the difference between fair market value and adjusted basis of the distributed property as per section 336. According to this, the gain or loss of Osprey Corporation in the distribution of land = $440,000-$200,000 = $240,000.
A gain of $240,000 is recognized.
b. In the similar way, the gain or loss recognized by the Osprey Corporation in the distribution of equipment = $140,000-$250,000 = ($110,000);
A loss of $110,000 is recognized.
Answer to question number 15:
a. Martin’s basis in property 1 as of January 04, 2016
= Carryover basis
= $300,000
Martin’s basis in property 2 as of January 04, 2016
= Basis as per step-down rule
= Carryover basis – Net built-in loss
= $525,000 – $50,000
= $475,000
b. Martin’s realized loss on the liquidating distribution of property 2
= Distribution FMV – Step-down basis
= $350,000 – $475,000
= $125,000
The loss that was inherent in the property on the date acquired would be disallowed by applying built-in loss limitation after considering the basis step-down rule.
Built-in loss limitation
= Acquisition FMV – Step-down basis
= $400,000 –$475,000
= $75,000
The remaining loss of $50,000 ($125,000–$75,000) is not subject to built-in loss limitation and it represents decline in the property’s FMV after being acquired by Martin.
As the distribution was not to a related party (more than 50% shareholder), the related-party loss limitation does not apply here. Thus, the recognized loss on the distribution of property 2 for Martin is $50,000.
Answer to question number 16:
Gain or loss recognized by G
= Amount realized – Basis of G
= (Value of Assets – Taxes Payable) – Basis of G
= ($920,000 –$134,000) –$280,000
= $506,000
Therefore, G would recognize a gain of $506,000
Answer to question number 18:
a. Goose Corporation recognizes no gain or loss under section 357 (a), 332. Stock is now zero, since S Corporation has been liquidate and it has no existence as on date.
b. G’s Corporation has a carryover basis of $700,000 ($2.4 million – $1.7 million) received assets in liquidation, for $1,700,000 have received assets and for the balance basis need to be carryover the amount.
Answer to question number 20:
a. C’s recognized gain will be equal to the difference between the market value and the adjusted basis of the property given.
C’s recognized gain = $500,000 – $245,000 = $255,000
b. Since F has distributed the property received from C, it will not recognize any loss.
Answer to question number 22:
a. Here is what Hosha realizes from reorganization.
Realized Gain Recognized Loss Postponed Loss Basis in Petal Stock
$23,0001 $0 ($2,000) $18,000
$25,000 $0 $2,000
($2,000) ($2,000) $20,000
1$5,000 + $18,000 = $23,000
Thus, Hosha’s realized loss is $2,000 but none of it is recognized.
b. Hosha’s basis in the Petal stock is $20,000.
Answer to question number 24:
a. Because the liability is more than the fair market value, we will use this to determine the gain/ loss.
$520,000 –$250,000 = $270,000
Oriole will recognize a $270,000 gain on the distribution.
b. Since the fair market value is greater than the liability that will be used to determine the gain/ loss.
$490,000 – $250,000 = $240,000
Oriole will recognize a gain of $240,000 on the distribution.
Answer to question number 25:

Gain recognized by Anar = ($575,000 – $425,000) – $100,000 = $50,000
Loss recognized by Mulberry Corporation = ($575,000 – $425,000) – $625,000 = $475,000
Answer to question number 32:
a) The consequences are as follows:
Gold-Ivory: The Gold Corporation will not realize any gain or loss by performing liquidation. Since the corporation owns 80% of the shares of the subsidiary, the basis for the inventory of Gold Corporation will be equal to $80,000 as an adjusted basis. However, this liquidation will remove the basis of the Gold Corporation from the stocks of the Ivory Corporation.
Ivory-Gold: The section 332 of the IRS applied to the liquidation of state dictates that a subsidiary corporation will not recognize any loss or gain from the property distribution from parent corporation. In this case, Ivory Corporation will not recognize any gain or loss from the distribution of inventory and cash from the Gold Corporation.
Imelda-Ivory: Since the share of Imelda in only 20% in the Ivory Corporation, it will recognize a gain of $25,000. The recognition of $25,000 is held to the cause that Imelda has $175,000 basis in stocks, while the quantity recognized is $200,000 (FMV of equipment). This will be the basis in equipment for Imelda.
Ivory-Imelda: The section 332 does not apply to the liquidation of Imelda because it is a minority shareholder with 20% stock in the subsidiary corporation. Here, the subsidiary corporation, Ivory Corporation, requires to recognize gain on distribution to a minority shareholder. However, in case of losses, it does not hold good i.e. Ivory cannot recognize the losses. Therefore, Ivory Corporation is not permitted to recognize loss of $150,000 [Adjusted basis of Equipment ($350,000) less FMV of Equipment ($200,000)] upon distribution of the equipment to Imelda.
b) Gold-Ivory: The section 332 will be applicable for the Gold Corporation. In liquidation, Gold Corporation does not recognize any loss or gain and takes a basis $350,000 in the equipment that is adjusted basis of equipment. The share of Gold Corporation in Ivory Corporation is eliminated with the basis.
Ivory-Gold: Ivory will be considered to be a subsidiary company. Therefore, according to the section 332, no gain or loss will be recognized by Ivory Corporation on the distribution of the cash and equipment by the Gold Corporation.
Imelda-Ivory: Imelda will recognize a gain of $25,000 as the fair market value, being minority shareholder, inventory will be used to calculate her profit/loss. Thus, her basis in the inventory will be $200,000.
Ivory-Imelda: Since the inventory is distributed to a minority shareholder, Ivory Corporation requires to recognize a gain of $120,000 due to the fair market value of inventory being greater than its adjusted basis.