Corporate Income Tax

Terms in this set (8)

1. Legal dissolution under state law is required for a liquidation to be complete for tax purposes.
a. True
b. False

ANSWER: False
RATIONALE: State law does not control in determining whether a liquidation has occurred for tax purposes. Rather, the test is whether the corporation has ceased to be a going concern.

2. One similarity between the tax treatment accorded liquidating and nonliquidating distributions is with respect to a shareholder's basis in property received in such distributions. For each type of distribution, the shareholder's basis is the property's fair market value on the date of distribution.
a. True
b. False

ANSWER: True

3. As a general rule, a liquidating corporation recognizes gains but not losses on the distribution of property in complete liquidation.
a. True
b. False

ANSWER: False
RATIONALE: Gain and loss recognition is the general rule for the liquidating corporation.

4. Liquidation expenses incurred by a corporation are generally deductible as § 162 trade or business expenses.
a. True
b. False

ANSWER: True

5. The related-party loss limitation applies to distributions to related parties and either the distribution is pro rata or the property distributed is disqualified property.
a. True
b. False

ANSWER: False
RATIONALE: The related-party loss limitation applies to liquidating distributions to related parties and either the distribution is not pro rata or the property distributed is disqualified property.

6. The builtin loss limitation in a complete liquidation does not apply to losses attributable to a decline in a property's
fair market value after its transfer to the corporation.
a. True
b. False

ANSWER: True
12. A subsidiary corporation is liquidated at a time when it is indebted to its parent corporation. The subsidiary corporation distributes property to the parent corporation in satisfaction of the indebtedness. If the liquidation is governed by § 332, neither the subsidiary nor the parent recognize gain or loss on the transfer of property in satisfaction of indebtedness.
a. True
b. False

ANSWER: False
RATIONALE: If pursuant to a liquidation under § 332, a subsidiary corporation does not recognize gain or loss on a transfer of property in satisfaction of indebtedness to its parent. However, the parent corporation does recognize gain or loss equal to the difference between the fair market value of the property received and the parent's basis in the indebtedness.

13. Brown Corporation purchased 85% of the stock of Green Corporation five years ago for $850,000. In the current year, Brown Corporation liquidates Green Corporation and acquires assets with a basis to Green Corporation of $700,000 (fair market value of $1.1 million). Brown Corporation will have a basis in the assets of $850,000, the same as Brown's basis in its Green stock.
a. True
b. False

ANSWER: False
RATIONALE: Brown has a basis of $700,000 in the assets, the same as Green's basis in the assets.

14. Sparrow Corporation purchased 90% of the stock of Warbler Corporation eight years ago for $1 million. In the current year, Sparrow liquidates Warbler and acquires assets with a basis to Warbler of $850,000 (fair market value of $1.2 million). Sparrow will have a basis in the assets of $850,000 (Warbler's basis in the assets), and no recognized gain or loss.
a. True
b. False

ANSWER: True

15. A subsidiary is liquidated pursuant to § 332. The parent has held 100% of the stock in the subsidiary for the past ten years. The subsidiary has a net operating loss carryover of $400,000. The net operating loss does not carry over to the parent.
a. True
b. False

ANSWER: False
RATIONALE: The carryover rules of § 381 apply to a liquidation under § 332. The parent corporation takes the subsidiary's basis in its assets and its tax attributes as well, including net operating loss carryover.

16. If a parent corporation makes a § 338 election, the subsidiary corporation is treated as a new corporation as of the
day following the qualified stock purchase date.
a. True
b. False

ANSWER: True
34. Pursuant to a complete liquidation, Lilac Corporation distributes the following assets to its unrelated shareholders: land held for three years as an investment (basis of $300,000, fair market value of $600,000), inventory (basis of $100,000, fair market value of $80,000), and marketable securities held for four years as an investment (basis of $200,000, fair market value of $240,000). What are the tax consequences to Lilac Corporation as a result of the liquidation?
a. Lilac Corporation would recognize no gain or loss on the liquidation.
b. Lilac Corporation would recognize a net capital gain of $320,000.
c. Lilac Corporation would recognize a net capital gain of $340,000 and an ordinary loss of $20,000.
d. Lilac Corporation would recognize a net capital gain of $340,000.
e. None of the above.

ANSWER: c
RATIONALE: A corporation generally recognizes both gains and losses on liquidating distributions, as if the property were sold for its fair market value. This deemed sale results in ordinary loss of $20,000 in the case of the inventory, and a net capital gain of $340,000 in the case of the investment properties.

35. Pursuant to a complete liquidation, Oriole Corporation distributes to its shareholders land with a basis of $350,000 and a fair market value of $800,000. The land is subject to a liability of $920,000. What is Oriole's recognized gain or loss on the distribution?
a. $0.
b. $120,000 loss.
c. $450,000 gain.
d. $570,000 gain.
e. None of the above.

ANSWER: d
RATIONALE: Section 336 provides that a liquidating corporation recognizes gain or loss on the distribution of property in complete liquidation. When property distributed in a complete liquidation is subject to a liability of the liquidating corporation, the fair market value of the property cannot be less than the amount of the liability. Thus, Oriole recognizes a gain of $570,000 [$920,000 (liability) - $350,000 (land basis)].

36. The stock in Rhea Corporation is owned by Jennifer (80%) and Lucy (20%), mother and daughter. In a liquidation of the corporation in the current year, Rhea distributes land that it purchased two years ago for $675,000 to Lucy. The property has a fair market value on the date of distribution of $450,000. One year later, Lucy sells the land for
$400,000. What loss, if any, will Rhea Corporation recognize with respect to the distribution of land?
a. $0.
b. $45,000.
c. $225,000.
d. $275,000.
e. None of the above.

ANSWER: a
RATIONALE: The related-party loss limitation applies to disallow the entire $225,000 loss realized on the distribution [$450,000 (fair market value) - $675,000 (land basis)]. There is a distribution of loss property to a related party (Lucy is deemed to own her mother's shares and, thus, 100% of Rhea Corporation directly and indirectly) and the distribution is not pro rata.
37. The stock in Toucan Corporation is held equally by two brothers. Four years ago, the shareholders transfer property (basis of $200,000, fair market value of $220,000) to Toucan Corporation as a contribution to capital. In the current year and pursuant to a complete liquidation of Toucan, the property is distributed proportionately to the brothers. At the time of the distribution, the property had a fair market value of $40,000. What amount of loss will Toucan Corporation recognize on the distribution of the property?
a. $0.
b. $20,000.
c. $160,000.
d. $180,000.
e. None of the above.

ANSWER: a
RATIONALE: The related-party loss limitation applies to disallow the entire $160,000 loss realized on the distribution [$40,000 (fair market value) - $200,000 (property basis)]. There is a distribution of loss property to a related party (both brothers own, directly and indirectly, 100% of Toucan) and the distribution consists of disqualified property (acquired by Toucan in a contribution to capital transaction within 5 years of the distribution). Since the property consists of disqualified property, it is irrelevant that the distribution is pro rata with respect to the shareholders.

38. Magenta Corporation acquired land in a § 351 exchange one year ago. The land had a basis of $320,000 and a fair market value of $350,000 on the date of the transfer. Magenta Corporation has two shareholders, Mark (70%) and Megan (30%), who are brother and sister. Magenta Corporation adopts a plan of liquidation in the current year. On this date, the land has decreased in value to $250,000. Magenta Corporation sells the land for $250,000 and distributes the proceeds pro rata to Mark and Megan. What amount of loss may Magenta Corporation recognize on the sale of the land?
a. $0.
b. $21,000.
c. $30,000.
d. $70,000.
e. None of the above.

ANSWER: d
RATIONALE: The related-party loss limitation does not apply to sales. The property does not have a built-in loss on the date of the transfer to the corporation; thus, the built-in loss limitation does not apply. The basis of the property to Magenta Corporation is $320,000 and, upon a sale of the property for $250,000, Magenta Corporation would recognize the $70,000 loss.
39. Purple Corporation has two equal shareholders, Joshua and Ellie, who are father and daughter. One year ago, the two shareholders transferred properties to Purple in a § 351 exchange. Joshua transferred land (basis of $600,000, fair market value of $450,000) and securities (basis of $70,000, fair market value of $250,000), while Ellie transferred equipment (basis of $420,000, fair market value of $700,000). In the current year, Purple Corporation adopts a plan of liquidation, sells all of its assets, and distributes the proceeds pro rata to Joshua and Ellie. The only loss realized upon disposition of the properties was with respect to the land that had decreased in value to $310,000 and was sold for this amount. Purple never used the land for any business purpose during the time it was owned by the corporation. What amount of loss can Purple Corporation recognize on the sale of the land?
a. $0.
b. $140,000.
c. $150,000.
d. $290,000.
e. None of the above.

ANSWER: b
RATIONALE: The sale of the land results in a realized loss of $290,000 [$310,000 (amount realized) - $600,000 (basis in land)]. The land had a builtin loss of $150,000 [$450,000 (fair market value) - $600,000 (basis)] on the date it was acquired in the § 351 exchange. Since the land was acquired within two years of the plan of liquidation, a tax avoidance purpose is assumed. There was no business purpose for transferring the property to Purple; thus, the built-in loss limitation disallows $150,000 of the loss. The related-party loss limitation does not apply to sales; therefore, the remaining $140,000 loss realized during the period Purple held the property is recognized. [Note that the § 362(e)(2) basis stepdown rules for loss properties acquired in carryover basis transactions does not apply to the land, as there was no net built-in loss on the two properties transferred by Joshua. Section § 362(e)(2) is discussed in Chapter 4.]

40. Last year Crow Corporation acquired land in a transaction that qualified under § 351. The land had a basis of
$400,000 to the contributing shareholder and a fair market value of $310,000. Assume that the shareholder also transferred equipment (basis of $100,000, fair market value of $200,000) in the same § 351 exchange. In the current year, Crow Corporation adopted a plan of liquidation and distributes the land to Ali, a shareholder who owns 20% of the stock in Crow Corporation. The land's fair market value was $230,000 on the date of the distribution to Ali. Crow Corporation acquired the land to use as security for a loan it had hoped to obtain from a local bank. In negotiating with the bank for a loan, the bank required the additional capital investment as a condition of its making a loan to Crow Corporation. How much loss can Crow Corporation recognize on the distribution of the land?
a. $0.
b. $80,000.
c. $90,000.
d. $170,000.
e. None of the above.

ANSWER: d
RATIONALE: Crow Corporation had a business reason for acquiring the land. Further, the land was not distributed to a related party. Thus, the loss limitation provisions do not apply and the entire loss of $170,000 [$230,000 (fair market value) - $400,000 (land basis)] is allowed. [Note that the § 362(e)(2) basis stepdown rules for loss properties acquired in carryover basis transactions does not apply to the land, as there was no net built-in loss on the two properties transferred by shareholder. Section § 362(e)(2) is discussed in Chapter 4.]
41. During the current year, Ecru Corporation is liquidated and distributes its only asset, land, to Kena, the sole shareholder. On the date of distribution, the land has a basis of $250,000, a fair market value of $650,000, and is subject to a liability of $500,000. Kena, who takes the land subject to the liability, has a basis of $120,000 in the Ecru stock. With respect to the distribution of the land, which of the following statements is correct?
a. Kena recognizes a gain of $530,000.
b. Ecru Corporation recognizes a gain of $250,000.
c. Kena recognizes a gain of $30,000.
d. Kena has a basis of $250,000 in the land.
e. None of the above.

ANSWER: c
RATIONALE: In a complete liquidation, a shareholder recognizes gain equal to the difference between the fair market value of property received from the corporation and the basis of the stock surrendered. When property is received subject to a liability, such liability reduces the amount realized by the shareholder. Thus, Kena recognizes a gain of $30,000 [$150,000 (net fair market value of land) - $120,000 (basis in Ecru stock)]. Ecru recognizes a gain of $400,000 [$650,000 (fair market value) - $250,000 (basis)] on the distribution of land. Kena's basis in the land is its fair market value on the date of the distribution, or $650,000.

42. In the current year, Dove Corporation (E & P of $1 million) distributes all of its property in a complete liquidation. Alexandra, a shareholder, receives land having a fair market value of $200,000. Dove Corporation had purchased the land as an investment three years ago for $125,000, and the land was distributed subject to a $100,000 liability. Alexandra took the land subject to the $100,000 liability. What is Alexandra's basis in the land?
a. $0.
b. $100,000.
c. $125,000.
d. $200,000.
e. None of the above.

ANSWER: d
RATIONALE: The basis of property received in a complete liquidation is the property's fair market value on the date of distribution, or $200,000.
43. After a plan of complete liquidation has been adopted, Condor Corporation sells its only asset, land (basis of
$220,000), to Eduardo (an unrelated party) for $300,000. Under the terms of the sale, Condor Corporation receives cash of $50,000 and Eduardo's notes for the balance of $250,000. The notes are payable over the next five years ($50,000 per year) and carry an appropriate interest rate. Immediately after the sale, Condor Corporation distributes the cash and notes to Maria, the sole shareholder of Condor Corporation. Maria has a basis of $30,000 in the Condor stock. The installment notes have a value equal to their face amount. If Maria wishes to defer as much gain as possible on the transaction, which of the following is correct?
a. Condor Corporation recognizes no gain or loss on the distribution of the installment notes.
b. Maria recognizes a gain of $20,000 in the year of liquidation.
c. Maria recognizes a gain of $45,000 in the year of liquidation.
d. Maria recognizes a gain of $270,000 in the year of liquidation.
e. None of the above.

ANSWER: c
RATIONALE: Maria may defer gain on the receipt of the notes to the point of collection. Maria will allocate her basis in the Condor stock between the cash and the installment notes. Using the relative fair market value approach, the stock basis is allocated $5,000 to the cash [$50,000 (amount of cash) ÷ $300,000 (total distribution) × $30,000 (stock basis)], and $25,000 to the notes [$250,000 (FMV of notes) ÷ $300,000 (total distribution) × $30,000 (stock basis)]. Maria must recognize a gain of $45,000 [$50,000 (cash received) - $5,000 (basis allocated to the cash)] in the year of liquidation. Maria will report 90% of each note collected as capital gain [$225,000 (gross profit) ÷ $250,000 (contract price)]. The interest element will be accounted for separately. Condor Corporation will recognize a gain on the distribution equal to the excess of the installment notes' fair market value and the basis Condor had in the notes.

44. Indigo has a basis of $1 million in the stock of Owl Corporation, a subsidiary in which it owns 100% of all classes of stock. Indigo purchased the stock in Owl 10 years ago. In the current year, Indigo liquidates Owl and acquires assets worth $1.2 million. At the time of its liquidation, Owl Corporation had a basis of $800,000 in the assets and E & P of $500,000. Which of the following statements is correct with respect to the liquidation?
a. Owl recognizes a gain of $400,000.
b. Indigo has an $800,000 basis in the assets.
c. Owl's E & P of $500,000 is eliminated.
d. Indigo recognizes a gain of $200,000.
e. None of the above.

ANSWER: b
RATIONALE: Indigo has a basis in the assets equal to Owl's basis [§ 334(b)], or $800,000. The liquidation is governed by § 332 and, as a result, neither Indigo Corporation [§ 332(a)] nor Owl Corporation [§ 337(a)] recognize gain (or loss). Under § 381, Owl's E & P ($500,000) carries over to Indigo.
45. The stock of Lavender Corporation is held as follows: 80% by Jade Corporation (basis of $400,000) and 20% by Tiffany (basis of $100,000). Lavender Corporation is liquidated in December of the current year, pursuant to a plan adopted earlier in the year. Pursuant to the liquidation, Lavender Corporation distributed Asset A (basis of $600,000, fair market value of $900,000) to Jade, and Asset B (basis of $250,000, fair market value of $225,000) to Tiffany. No election is made under § 338. With respect to the liquidation of Lavender:
a. Lavender recognizes a loss of $25,000 on the distribution of Asset B.
b. Jade has a basis in Asset A of $900,000.
c. Tiffany has a basis in Asset B of $225,000.
d. Jade recognizes a gain of $500,000.
e. Lavender recognizes a gain of $300,000 on the distribution of Asset A.

ANSWER: c
RATIONALE: Tiffany has a basis in Asset B equal to its fair market value, or $225,000. In distributions from a subsidiary corporation to a minority shareholder, pursuant to a § 332 parentsubsidiary liquidation, gains but not losses are recognized. Thus, Lavender does not recognize the $25,000 loss realized on the distribution of Asset B to Tiffany [$225,000 (fair market value) - $250,000 (basis in Asset B)] (option a.). In a § 332 parentsubsidiary liquidation, the parent corporation recognizes no gain or loss and takes a carryover basis in assets received. Thus, Jade recognizes no gain (option d.) and has a basis in Asset A equal to Lavender's basis, or $600,000 (option b.). A subsidiary recognizes no gain or loss on liquidating distributions to a parent corporation under § 332; thus, Lavender recognizes no gain on the distribution of Asset A to Jade (option e.).

46. Penguin Corporation purchased bonds (basis of $190,000) of its 100% owned subsidiary, Finch Corporation, at a discount. Pursuant to a § 332 liquidation and in satisfaction of the indebtedness, Finch distributes land worth $200,000 (basis of $160,000) to Penguin. Which of the following statements is correct with respect to the distribution of land?
a. Neither Finch nor Penguin recognize gain (or loss).
b. Finch recognizes no gain and Penguin recognizes a gain of $10,000.
c. Finch recognizes a gain of $40,000 and Penguin recognizes no gain.
d. Finch recognizes a gain of $40,000 and Penguin recognizes a gain of $10,000.
e. None of the above.

ANSWER: b
RATIONALE: Penguin recognizes a gain of $10,000 [$200,000 (value of land) - $190,000 (basis in bonds)]. Finch recognizes no gain or loss on distributions pursuant to a § 332 liquidation, even if property is transferred in satisfaction of indebtedness to Penguin.
47. The stock of Loon Corporation is held as follows: 85% by Duck Corporation and 15% by Gerald, an individual. Loon Corporation is liquidated in December of the current year, pursuant to a plan adopted earlier in the year. Loon Corporation distributes land with a basis of $350,000 and fair market value of $390,000 to Gerald in liquidation of his stock interest. Gerald had a basis of $200,000 in his Loon stock. How much gain will Loon Corporation recognize in this liquidating distribution?
a. $0.
b. $40,000.
c. $190,000.
d. $390,000.
e. None of the above.

ANSWER: b
RATIONALE: In a § 332 liquidation, a distribution of property to a minority shareholder is treated in the same manner as a nonliquidating distribution; that is, gain but not loss is recognized by the corporation on the distribution. Thus, the distribution of the land to Gerald results in a recognized gain of $40,000 ($390,000 - $350,000).

48. Scarlet Corporation, the parent corporation, has a basis of $600,000 in the stock of Brown Corporation, a subsidiary in which it owns 90% of all classes of stock. Scarlet purchased the stock in Brown Corporation 10 years ago. In the current year, Scarlet Corporation liquidates Brown Corporation and acquires assets worth $800,000 and with a tax basis to Brown Corporation of $950,000. What basis will Scarlet Corporation have in the assets acquired from Brown Corporation?
a. $0.
b. $600,000.
c. $800,000.
d. $950,000.
e. None of the above.

ANSWER: d
RATIONALE: Property received by a parent corporation in a complete liquidation of its subsidiary under § 332 has the same basis the property had in the hands of the subsidiary, or $950,000. The parent's basis in the stock of the liquidated subsidiary disappears.

49. During the current year, Goldfinch Corporation purchased 100% of the stock of Dove Corporation and made a
qualified election under § 338. Which of the following statements is incorrect with respect to the § 338 election?
a. Dove is treated as a new corporation as of the day following the qualified stock purchase date.
b. Dove must be liquidated pursuant to the § 338 election.
c. Dove Corporation is treated as having sold its assets on the qualified stock purchase date.
d. Dove can recognize gain or loss as a result of the § 338 election.
e. None of the above.

ANSWER: b
RATIONALE: Dove Corporation may, but need not, be liquidated. Dove is treated as a new corporation as of the day following the qualified stock purchase date. Dove Corporation is treated as having sold its assets on the qualified stock purchase date. The deemed sale that results from a § 338 election can result in recognized gain or loss for the subsidiary (Dove).
50. Which of the following statements is correct with respect to the § 338 election?
a. The subsidiary corporation makes the § 338 election.
b. A qualified stock purchase occurs when a corporation acquires, in a taxable transaction, at least 80% of the stock (voting power and value) of another corporation within an 18-month period.
c. The parent recognizes no gain (loss) as a result of the election.
d. Gain, but not loss, is recognized by the subsidiary as a result of a deemed sale of its assets.
e. None of the above.

ANSWER: c
RATIONALE: The parent recognizes no gain (loss) as a result of the election. The parent corporation makes the § 338 election (option a.). To count towards the 80% qualified stock purchase requirement, the stock must be acquired in a taxable transaction and within a 12-month period (option b.). Gains and losses are recognized by the subsidiary in the deemed sale of its assets (option d.).

51. Which of the following statements is true?
a. The dollar amounts involved in reorganizations are generally substantial; thus, it is important that the financial and tax treatment of the reorganization is consistent.
b. A letter ruling indicates the income tax treatment the IRS will apply to the proposed corporate restructuring transaction.
c. Careful planning can ensure that all gains recognized by individual shareholders receive beneficial dividend treatment.
d. Corporations prefer to recognize capital gains on reorganizations because they can offset the capital losses they may have.
e. None of the statements is true.

ANSWER: b
RATIONALE: Tax and financial treatment need not be consistent (option a.). Individual shareholders prefer capital gain treatment (option c.) and corporations prefer dividend treatment (option d.).

52. All of the following statements are true about corporate reorganization except:
a. Taxable amounts for shareholders are classified as a dividend or capital gain.
b. Reorganizations receive treatment similar to corporate formations under § 351.
c. The transfers of stock to and from shareholders qualify for like-kind exchange treatment.
d. The value of the stock received by the shareholder less the gain not recognized (postponed) will equal the
shareholder's basis in the stock received.
e. All of the above statements are true.

ANSWER: c
RATIONALE: Reorganizations do not qualify for like-kind treatment.
53. Which of the following statements is true concerning all types of tax-free corporate reorganizations?
a. Assets are transferred from one corporation to another.
b. Stock is exchanged with shareholders.
c. Liabilities that are assumed when cash is also used as consideration will be treated as boot.
d. Corporations and shareholders involved in the reorganization will recognize gains but not losses.
e. None of the above statements is true.

ANSWER: e
RATIONALE: Assets are transferred in a "Type B" (option a.). In a "Type G" shareholders may receive no stock. Also a "Type E" can just involve bonds (option b.). The issue of liabilities being treated as boot is only a problem for a "Type C" (option c.). Shareholders can recognize losses when they only receive boot and no stock (option d.).

54. A shareholder bought 10,000 shares of Coral Corporation for $50,000 several years ago. When the stock is valued at
$90,000, Coral redeems the shares in exchange for 5,000 shares of Blush Corporation stock and a $10,000 Blush bond. This transaction meets the requirements of § 368. Which of the following statements is false with regard to this transaction?
a. The shareholder has a realized gain of $40,000.
b. The shareholder has a postponed gain of $30,000.
c. The shareholder has a basis in the Blush stock of $60,000.
d. The shareholder has a recognized gain of $10,000.
e. All of the above statements are true.

ANSWER: c
RATIONALE: The shareholder's basis in the Blush stock is $50,000 [$80,000 FMV of stock received ($90,000 value of Coral - $10,000 bond received) - $30,000 postponed gain].

55. Bobcat Corporation redeems all of Zed's 4,000 shares and distributes to him 2,000 shares of Van Corporation stock plus $50,000 cash. Zed's basis in his 20% interest in Bobcat is $100,000 and the stock's value is $250,000. At the time Bobcat is acquired by Van, the accumulated earnings and profits of Bobcat are $200,000 and of Van are $75,000. How does Zed treat this transaction for tax purposes?
a. No gain is recognized by Zed in this reorganization.
b. Zed reports a $50,000 recognized dividend.
c. Zed reports a $50,000 recognized capital gain.
d. Zed reports a $40,000 recognized dividend and a $10,000 capital gain.
e. Not enough information is available to determine proper treatment.

ANSWER: d
RATIONALE: Zed has a realized gain of $150,000 ($250,000 - $100,000). His proportionate share of Bobcat Corporation's accumulated earnings and profits is $40,000 ($200,000 × 20% = $40,000) and the remaining $10,000 gain is capital gain.
56. Yoko purchased 10% of Toyger Corporation's stock six years ago for $70,000. In a transaction qualifying as a "Type C" reorganization, Yoko received $50,000 cash and 8% of Angora Corporation's stock (valued at $100,000) in exchange for her Toyger stock. Prior to the reorganization, Toyger had $200,000 accumulated earnings and profits and Angora had $300,000. How does Yoko treat the exchange for tax purposes?
a. As a recognized $50,000 long-term capital gain.
b. As a $50,000 dividend.
c. As a $20,000 dividend and a $30,000 capital gain.
d. As a $30,000 dividend and a $20,000 capital gain.
e. None of the above.

ANSWER: a
RATIONALE: If Yoko had received only stock, she would have received 12% of Angora ($100,000 ÷ 8% =
$1,250,000 total shares; $150,000 ÷ $1,250,000 = 12%). Since Yoko owns 8% of Angora, which is less than 80% of the stock she would have owned (8% ÷ 12% = 67%), and she owns less than 50% of Angora, she meets the § 302(b)(2) qualifications for redemption treatment.

57. Korat Corporation and Snow Corporation enter into an acquisitive "Type D" reorganization. Xin currently holds a 20 year, $10,000 Snow bond paying 4% interest. There are 8 years until the bond matures. In exchange for his Snow bond, Xin receives an 8 year $16,000 Korat bond paying 2.5% interest. Xin thinks this is fair because he will still receive $400 of interest each year and both bonds mature on the same date. How does Xin treat this transaction on his tax return?
a. Xin recognizes no gain or loss on the exchange of bonds.
b. Xin recognizes $750 gain each year for the next 8 years.
c. Xin recognizes $6,000 capital gain.
d. Xin recognizes $6,000 ordinary gain.
e. None of the above.

ANSWER: c
RATIONALE: Xin recognizes a capital gain to the extent that the principal amounts of the bonds received are in excess of the bonds given up, or $6,000.

58. Mars Corporation merges into Jupiter Corporation by exchanging all of its assets for 300,000 shares of Jupiter stock valued at $2 per share and $100,000 cash. Wanda, the sole shareholder of Mars, surrenders her Mars stock (basis $900,000) and receives all of the Jupiter stock transferred to Mars plus the $100,000. How does Wanda treat this transaction on her tax return?
a. Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $900,000.
b. Wanda recognizes a loss of $100,000. Her Jupiter stock basis is $800,000.
c. Wanda recognizes a $100,000 gain. Her Jupiter stock basis is $700,000.
d. Wanda realizes a $200,000 loss of which $100,000 is recognized. Her Jupiter stock basis is $1 million.
e. None of the above.

ANSWER: e
RATIONALE: Wanda has a realized loss of $200,000; however, losses are not recognized in reorganizations. Her basis in her Jupiter stock will be $800,000 ($600,000 value of stock received + $200,000 postponed loss OR $900,000 - $100,000 cash received).
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