Question

QUESTION 15

1. Corporation W owns 100% of the common stock of Corporation Z with a basis of $300. Z owns a rental building (its only asset) with a gross fair market value of $3,000, subject to a non-recourse mortgage of $1,200. Z’s adjusted basis for this building is $900. Z has $600 of E&P. Z is on the accrual method of accounting and reports on the calendar year. Z and W do not report on a consolidated basis. Z distributes the building to W in complete liquidation and W sells the building to Corporation V for $1,800 cash, subject to the debt.

   	a.	W recognizes no gain on the liquidation under Section 332.
   	b.	Z has gain on the liquidation under Section 336.
   	c.	W would recognize no gain on the sale to V.
   	d.	All of the above.
   	e.	Both A and C of the above.

2 points   

QUESTION 16

1. Corporation W owns 100% of the common stock of Corporation Z with a basis of $300. Z owns a rental building (its only asset) with a gross fair market value of $3,000, subject to a non-recourse mortgage of $3,300 . Z’s adjusted basis for this building is $900. Z has $600 of E&P. Z is on the accrual method of accounting and reports on the calendar year. Z and W do not report on a consolidated basis. Z distributes the building to W in complete liquidation and W sells the building to Corporation V for $1,800 cash, subject to the debt.

   Same facts as above, except that the liability on the building is $3,300 rather than $1,200.

   	a.	W recognizes no gain or loss on the liquidation under Section 332.
   	b.	Z recognizes $2,400 gain under Section 336.
   	c.	Neither of the above.
   	d.	Both A and B of the above.

Answer 1

15)

Option d is correct as u/s 332 No gain or loss shall be recognized on the receipt by a corporation of property distributed in complete liquidation of another corporation.

W recognizes no gain or loss on the liquidation under Section 332.

b Z recognizes $2,400 gain under Section 336

16)

ANS) (d) Both A& B

A company whose voting stock is more than 50% controlled by another company, usually referred to as the parent company or holding company. A subsidiary is a company that is partly or completely owned by another company that holds a controlling interest in the subsidiary company.

WHEN A PARENT CORPORATION LIQUIDATES ITS MORE THAN 80% OF ITS SUBSIDIARY, THE PARENT CORPORATION (AS STOCK HOLDER) WILL NOT RECOGISE ANY GAIN OR LOSS O SALE OF ASSETS.

A corporate liquidation should be considered at two levels

The shareholder level and the corporate level. On the shareholder level, a complete liquidation can be thought of as a sale of all outstanding corporate stock held by the shareholders in exchange for all of the assets in that corporation. Like any sale of stock, the shareholder receives capital gain treatment on the difference between the amount received by the shareholder in the distribution and the cost or other basis of the stock.

At the corporate level, the corporation recognizes gain or loss on the liquidation in an amount equal to the difference between the fair market value and the adjusted basis of the assets distributed. Effect of liquidation on the liquidating corporation

Tax attributes of the corporation, such as NOL carryovers and E&P, disappear when the corporation is liquidated. b) Sec. 336 (a) – A liquidating corporation recognizes gain AND loss on distribution of property in complete liquidation. Property treated as though sold at FMV. (This is unlike no liquidating distributions, where gains are required to be recognized but losses are not allowed). c) Sec. 336(b) – If sh assumes liab. in liquidating distribution, the FMV for purposes of calculating gain/loss cannot be less than the value of the liability