2009_Solutions__005 - H Chapter Five H COMPLETE...

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H Chapter Five H COMPLETE LIQUIDATIONS SOLUTIONS TO PROBLEM MATERIALS DISCUSSION QUESTIONS 5-1 It appears that the distributions will be considered to be made in complete liquidation. The brothers had an informal plan of liquidation, and a status of liquidation existed following the adoption of the informal plan. The fact that there was a series of distributions and that the corporation was not terminated are immaterial. The determination that the distributions were in liquidation is necessary to compute the includible income of the shareholders (gain or dividend). (See pp. 5-2 and 5-3.) 5-2 J will treat the distribution as the proceeds from the sale of stock. The $80,000 realized gain will be recognized. (See p. 5-4.) 5-3 The basis of property received in a taxable liquidation is the property’s fair market value. Therefore, the equipment will have a basis of $40,000 and the land will have a basis of $60,000. (See p. 5-7.) 5-4 Under the general rule of § 336, P Corp. will be treated as if it sold the assets for their fair market value. P Corp. will recognize a net gain of $35,000 ($40,000 gain on land less $5,000 loss on patent), which would be subject to tax on its final tax return. (See pp. 5-8 and 5-9.) 5-5 a. M Corp. will recognize $15,000 gain on the distribution of the land. (See Example 9 and p. 5-8.) b. Assuming M Corp. uses $2,250 cash to pay its resulting tax liability from this liquidation ($15,000 taxable gain on deemed sale of land ± 15% ¼ $2,250) and uses its remaining $7,750 cash to reduce the balance of its accounts payable down to $250 (which will be assumed by its sole shareholder), Q will receive assets with a net fair market value of $69,750 ($30,000 machinery þ $40,000 land ÿ $250 unpaid accounts payable) and be required to recognize a gain of $39,750 ($69,750 net FMV ÿ $30,000 basis). (See p. 5-5.) c. The bases of the assets will be their fair market values. (See p. 5-7.) 5-6 E Corporation must meet the conditions of § 332. E must own at least 80 percent of the voting power and at least 80 percent of the value of stock of T. If T adopts a plan of liquidation, it has up to three years to distribute all of its assets to E. If a plan is not adopted, the distribution must occur within any one taxable year. The ability to use the loss may be limited. See the discussion of § 382 in Chapter 7. (See pp. 5-11 and 5-12.) 5-7 a. The IRS could argue that E actually bought the asset and not the stock. In this situation, they can treat the purchase of stock followed by a liquidation as a purchase of assets under Kimbell-Diamond . (See pp. 5-16 and 5-17.) b. The Kimbell-Diamond rule was replaced by § 338 in 1982. According to Committee reports, the rule has no continuing vitality. (See p. 5-17.) 5-8 a. Assuming the purchase of stock qualifies, L can elect § 338. Under § 338, M is permitted to write the assets up to the purchase price of the stock. (See pp. 5-16 through 5-21.) b. The plan outlined above will require M to pay tax on the deemed sale of the asset from old M to new M. The only way to receive the step-up without tax is to buy the assets directly. (See p. 5-21.) 5-9
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This note was uploaded on 06/23/2009 for the course BUPA 539 taught by Professor Jamison during the Fall '09 term at IUPUI.

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2009_Solutions__005 - H Chapter Five H COMPLETE...

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