Tax Consequences of the Liquidation

Tax Consequences of the Liquidation

 

1. Geoffrey Corporation is owned 80% by Zenith Corporation and 20% by Rocky Gillett, a Geoffrey A preliquidation balance sheet for Geoffrey is presented below:

 

⁵(Click the icon to view the balance sheet.)

 

Requirement

⁶(Click the icon to view additional information.)

 

What are the tax consequences of the liquidation to Rocky Gillett, Zenith Corporation, and Geoffrey Corporation?

 

What are the tax consequences of the liquidation to Geoffrey Corporation?

 

Begin by computing the gain or loss recognized for each asset for Geoffrey Corporation. (Complete all input fields. Enter a “0” for amounts with a zero value. Use parentheses or minus sign for a loss. Do not round intermediary calculations.)

 

Gain or loss recognized

 

Equipment Land

Total

 

Corporate taxes owed by Geoffrey Corporation is                     .

 

(1)

What are the tax consequences of the liquidation to Zenith Corporation? (Do not round intermediary calculations. Only round the amounts you enter in the input fields to the nearest whole dollar.)

 

 

(2)

Zenith

gain or loss on the redemption of Geoffrey Corporation stock held by Zenith. Zenith a gain or loss on the retirement of Geoffrey bonds held by Zenith Corporation.

 

Zenith’s basis for the property received: cash, land,   .

: inventory,

; equipment,

; and

 

What are the tax consequences of the liquidation to Rocky Gillett?

 

 

Rocky Gillett

the

realized on the distribution from Geoffrey

 

(3)

(4)

Corporation. Rocky’s basis for property received: cash, and land,        .

; inventory,

; equipment                     ;

 

 

5: Data Table

 

Assets                                       Basis                           FMV

Cash	$         80,000	$          80,000
Inventory	490,000	840,000
Equipment	100,000	130,000

Land                                                   400,000                 320,000

 

 

Total

$     1,070,000

$      1,370,000

 

 

 

Liabilities &Equity

 

Accounts payable	$       150,000	$        150,000
Bonds payable to Zenith	570,000	570,000
Common stock	200,000	650,000

Retained earnings (and E&P)                150,000

 

 

Total

$     1,070,000

$      1,370,000

 

 

6: More Info

Geoffrey has claimed $210,000 of MACRS depreciation on the equipment. Geoffrey purchased the land three years ago as a potential plant site. Plans to build the plant never were consummated, and Geoffrey has held the land since then as an investment. Zenith and Rocky Gillett have $160,000 and $40,000 bases, respectively, in their Geoffrey stock. Both shareholders have held their stock since the corporation’s inception ten years ago. Geoffrey adopts a plan of liquidation. Geoffrey transfers $570,000 of inventory to Zenith to retire the bonds. The shareholders receive their share of Geoffrey’s remaining assets and assume their share of Geoffrey’s liabilities (other than federal income taxes). Geoffrey pays federal income taxes owed on the liquidation. Assume a 21% corporate tax rate.

 

 

(1)

does not recognize recognizes

(2)

does not recognize recognizes

(3)

does not recognize recognizes

 

 

 

(4)

capital gain capital loss ordinary gain

ordinary loss

 

 

 

2. Beta Corporation purchases 20% of Delta Corporation stock from Mickey on August 10 of the current Beta purchases an additional 30% of the stock from Nolan on November 15 of the current year. Beta purchases the remaining 50% of the Delta stock from Pat on April 10 of the following year. The total price paid for the stock is $2.3 million. Delta’s balance sheet on April 10 of the following year shows assets with a $3 million FMV, a $1.1 million adjusted basis, and $150,000 in liabilities.

Read the requirements⁷.

 

Requirement a. What is the acquisition date for the Delta stock for Sec. 338 purposes? By what date must Beta make the Sec. 338 election?

 

(1)

The acquisition date is                                                            The Sec. 338 election must be made

 

Requirement b. If Beta makes a Sec. 338 election, what is the aggregate deemed sale price for the assets?

 

First, select the formula, then compute the aggregate deemed sale price for the assets. (Abbreviations used.⁸ Round your answer to the nearest whole dollar.)

 

ADSP   = (3)                               

 

ADSP       =

 

Requirement c. What is the total basis of the assets following the deemed sale, assuming a 21% corporate tax rate?

 

The total basis is                       .

 

Requirement d. How does the tax liability attributable to the deemed sale affect the price Beta might be willing to pay for the Delta stock?

 

(4)

The tax liability attributable to the deemed sale                                     the acquisition price.

 

Requirement e. What happens to Delta’s tax attributes following the deemed sale?

 

(5)

The tax attributes                            if Acquiring makes a Sec. 338 election because

 

7: Requirements

1. What is the acquisition date for the Delta stock for 338 purposes? By what date must Beta make the Sec. 338 election?
2. If Beta makes a 338 election, what is the aggregate deemed sale price for the assets?
3. What is the total basis of the assets following the deemed sale, assuming a 21% corporate tax rate?
4. How does the tax liability attributable to the deemed sale affect the price Beta might be willing to pay for the Delta stock?
5. What happens to Delta’s tax attributes following the deemed sale?

 

8: Definition

 

ADSP	=	Aggregate deemed sale price
B	=	the adjusted basis of the asset(s) deemed sold
G	=	The acquiring corporation’s grossed-up basis in recently purchased target corporation stock
L	=	The target corporation’s liabilities other than its tax liability for the deemed sale gain determined by reference to the ADSP
TR	=	the applicable federal income tax rate

 

(1)

April 10 of the following year. August 10 of the current year. December 31 of the following year.

November 15 of the current year.

 

 

 

(2)

by December 31 following the acquisition date. by January 15 following the acquisition date. no later than 30 days from the acquisition date.

on the acquisition date.

 

 

 

(3)

B + L 1 − TR

B + L −    TR x G 1 − TR

B + L −    TR x B

1 − TR G + L − TR x B

1 − TR

 

G − L −   TR + B

(4)

 

has no impact on is likely to increase is likely to lower

(5)

 

are the same disappear

 

 

(6)

tax attributes are transferred into the “new” target corporation. the “old” target corporation goes out of existence.

 

3. As part of a Type C reorganization, Giant Corporation exchanges $200,000 of its voting common stock and $40,000 of its bonds for all of Oregon Corporation’s Oregon liquidates, with each of its two shareholders receiving equal amounts of the Giant stock and bonds. Donna has a $60,000 basis in her stock, and Joe has a $150,000 basis in his stock. Joe and Donna, who are unrelated, each own 8% of Giant’s stock (2,000 shares) immediately after the reorganization. At the time of the reorganization, Oregon’s E&P balance is $50,000, and its assets have an adjusted basis of $190,000.

Read the requirements⁹.

 

Requirement a. What is the amount of Oregon’s recognized gain or loss in the asset transfer? On the distribution of the stock and bonds? (Use parentheses or a minus sign for a loss. Complete all input fields. Enter “0” if no gain or loss is recognized.)

 

Recognized gain/(loss)

Distribution

 

Requirement b. What is Giant’s basis in the assets it acquired?

 

Giant’s basis in the asset acquired is                                  .

 

Requirement c. What are the amount and character of each shareholder’s recognized gain or loss? (Use parentheses or a minus sign for a loss. Complete all input fields. Enter “0” if no gain or loss is recognized, then select “N/A” as character.)

 

(1)

(2)

Amount                      Character

Donna Joe

Requirement d. What is the basis of each shareholder’s Giant stock? Giant bonds?

 

Stock basis             Bonds basis

Joe

 

9: Requirements

1. What is the amount of Oregon’s recognized gain or loss in the asset transfer? On the distribution of the stock and bonds?
2. What is Giant’s basis in the assets it acquired?
3. What are the amount and character of each shareholder’s recognized gain or loss?
4. What is the basis of each shareholder’s Giant stock? Giant bonds?

 

 

(1)

Capital gain Dividend

Return of capital

N/A        (2)

Capital gain Dividend

Return of capital

N/A

 

 

 

4. Parent Corporation has owned all 300 shares of Subsidiary Corporation common stock since Parent has been in the business of manufacturing and selling light fixtures, and Subsidiary has been in the business of manufacturing and selling light bulbs. Anna and Edward are the two equal shareholders of the Parent stock and have owned their stock since 2012. Anna’s basis in her 150 Parent shares is $740,000, and Edward’s basis in his 150 Parent shares also is $740,000. On April 10, 2019, Parent distributes all 300 Subsidiary shares to Edward in exchange for all his Parent shares (which are cancelled). The distribution has a bona fide business purpose. The Subsidiary stock had a $30,000 basis to Parent on the distribution date. At the end of 2019, Parent has $160,000 of E&P. Immediately after the distribution, the FMVs of the Parent and Subsidiary stocks are $3,000 and $2,500 per share, respectively.

Read the requirements¹⁰.

 

Requirement a. What are the amount and character of the gain, loss, or income Edward must recognize as a result of Parent’s distributing the Subsidiary stock? (Use parentheses or a minus sign for a loss. Complete all input fields. Enter “0” if no gain or loss is recognized, then select “N/A” as character.)

Character                    Gain/(loss)

 

Requirement b. What basis does Edward take in the Subsidiary stock?

 

Edward’s basis in his Subsidiary stock is                                  .

 

Requirement c. When does Edward’s holding period for the Subsidiary stock begin?

 

Edward’s holding period for the Subsidiary stock (2)                               

 

Requirement d. Assume instead that Kenneth formed Subsidiary in 2015 to manufacture and sell lightbulbs. Kenneth sold the Subsidiary stock to Parent for cash in 2017. How would your answers to Parts a–c change?

 

What are the amount and character of the gain, loss, or income Edward must recognize under this scenario.

Character                    Gain/(loss)

 

What basis does Edward take in the Subsidiary stock under this scenario?

 

Edward’s basis in his Subsidiary stock is                               .

 

When does Edward’s holding period for the Subsidiary stock begin under this scenario?

 

Edward’s holding period for the Subsidiary stock (4)                               

 

10: Requirements

1. What are the amount and character of the gain, loss, or income Edward must recognize as a result of Parent’s distributing the Subsidiary stock?
2. What basis does Edward take in the Subsidiary stock?
3. When does Edward’s holding period for the Subsidiary stock begin?
4. Assume instead that Kenneth formed Subsidiary in 2015 to manufacture and sell Kenneth sold the Subsidiary stock to Parent for cash in 2017. How would your answers to Parts a–c change?

 

(1)

 

 

 

 

 

(3)

Capital gain Dividend

Return of capital

 

 

 

Capital gain Dividend

Return of capital

N/A        (2)         begins the day after the exchange date.

begins the day before the exchange date. includes his holding period for the Parent stock.

 

 

N/A        (4)         begins on the exchange date.

begins the day after the exchange date.

is the same as his holding period for the Parent stock.

 

 

 

5. At the close of business on May 31, 2019, New Mexico Corporation exchanges $6 million of its voting common stock for all the noncash assets of Alabama Corporation. Alabama uses its cash to pay off its liabilities and then liquidates. Alabama and New Mexico report the following taxable income (loss):

¹¹(Click the icon to view the taxable income (loss).) Read the requirements¹².

 

Requirement a. What tax returns must New Mexico and Alabama file for 2019?

 

(1)   (2)

(3)   (4)

Return                      Period

New Mexico Corporation Alabama Corporation

Requirement b. What amount of the NOL carryover does New Mexico acquire? In your calculation, disregard the 80% of taxable income NOL limitation. (Enter “0” if New Mexico does not acquire any NOL carryover.)

 

The amount of NOL carryover that New Mexico acquires from Alabama Corporation is                        .

 

Requirement c. Ignoring any implications of Sec. 382, what amount of Alabama’s NOL can New Mexico use in 2019? (Use a 365-day year for computations. Do not round intermediary calculations. Only round the amount you input in the cell to the nearest dollar. Enter a “0” if New Mexico cannot use Alabama’s NOL in 2019.)

 

The amount of Alabama’s NOL that New Mexico can use in 2019 is                    .

 

 

11: Data Table
	Tax Year Ending	New Mexico Corp.	Alabama Corp.
	December 31, 2016	$        (140,000) $	(95,000)
	December 31, 2017	90,000	48,000
	December 31, 2018	100,000	(41,000)
	May 31, 2019	XXX	(57,000)
	December 31, 2019	87,600	XXX
12: Requirements

1. What tax returns must New Mexico and Alabama file for 2019?
2. What amount of the NOL carryover does New Mexico acquire? In your calculation, disregard the 80% of taxable income NOL
3. Ignoring any implications of 382, what amount of Alabama’s NOL can New Mexico use in 2019?

 

 

(1)

final return initial return single return

(2)

1/1/19 through 5/31/19 6/1/19 through 12/31/19 1/1/19 through 12/31/19

(3)

final return initial return single return

 

 

(4)

1/1/19 through 5/31/19 6/1/19 through 12/31/19 1/1/19 through 12/31/19