TAX 9866 Lecture Notes - Lecture 5: Liquidating Distribution, Transfer Pricing, Profit Sharing

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20 Dec 2019

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To a minority shareholder distributions in the case where property was acquired in a 351 or capital contribution where the principal purpose of the transaction was for the corporation to recognize loss on liquidating sale, exchange or distribution. Loss is limited to the amount of loss accrued during the corporate ownership period. Property acquired within 2 years of adoption of a plan to liquidate will automatically be treated as part of plan to recognize corporate loss on liquidating distribution. Parent takes carryover basis equal to the assets distributed (outside basis of parent disappears) Inherits subsidiary"s e&p pool & other tax attributes (stay in tax) Nonrecognition (tax free treatment) applies to situations in which there is a controlling parent. The liquidating subsidiary does not recognize g/l (tax-free to all parties) Minority shareholders would apply rules under 331(a) and will recognize g/l (a/r-basis) Transfer pricing 482 reallocation of income and expenses.

Related Questions

true and false questions

A redemption is always "essentially equivalent to a dividend"where a corporation's sole stockholder causes part of his shares tobe redeemed by the corporation.

When a partner receives a cash distribution from a partnershipthe partner always recognizes a gain on such distribution.

If a partner receives a non-liquidating cash distribution, thepartner will recognize a loss if the cash distributed is less thanthe partner's outside basis at the time of the distribution.

When a partnerâs share of partnership liabilities and debts isreduced or relieved, such reduction or relief is treated as adeemed cash distribution which increases the partnerâs outsidebasis.

A partner contributes property used in a trade or business to apartnership in return for a partnership interest. The partner heldthe property for 2 years prior to contribution. The partner thensells his partnership interest three weeks later. The contributingpartner will realize a short-term capital gain/loss on the sale ofhis partnership interest.

A distribution by a C-corporation that has Earnings and Profitsis always a dividend.

John is a 30% partner in the ABC Partnership with an outsidebasis of $42,000. ABC partnership distributes $15,000 of cash incomplete liquidation of Johnâs interest. John recognizes anordinary loss of $27,000 on the distribution

Like partnerships, an S corporation shareholder's stock basismust be adjusted annually.

A related party individual that receives a liquidatingdistribution from a corporation can recognize a loss

If a partnership makes a non-liquidating distribution oftangible property, and the inside basis of the property exceeds theoutside basis of the recipient-partner, the partnerâs basis in thedistributed property is equal to his outside basis and he realizesgain on the difference between the inside basis and outsidebasis.

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Rex and Felix are the sole shareholders of the Dogs and CatsCorporation (DCC). After several years of operations using theaccrual method, they decided to liquidate the corporation andoperate the business as a partnership. Rex and Felix hired a lawyerto draw up the legal papers to dissolve the corporation, but theyneed some tax advice from you, their trusted accountant. They arehoping you will find a way for them to liquidate the corporationwhile minimizing their total income tax liability.

Rex has a tax basis in his shares of $72,000 and Felix has a taxbasis in his shares of $36,000. The DCCâs tax accounting balancesheet at the date of liquidation is as follows: (Negativeamounts should be indicated by a minus sign. Leave no answer blank.Enter zero if applicable.) Corporate tax rate

	Adjusted Basis		FMV
Assets
Cash	$	34,000	$	34,000
Accounts receivable		11,000		11,000
Inventory		11,000		22,000
Equipment		34,000		22,000
Building		17,000		34,000
Land		13,000		50,000
Total assets	$	120,000	$	173,000
Liabilities
Accounts payable			$	5,000
Mortgage payableâBuilding				7,500
Mortgage payableâLand				7,500
Total liabilities			$	20,000
ShareholdersâEquity
Common stockâRex (80%)	$	72,000	$	118,000
Common stockâFelix (20%)		36,000		35,000
Total shareholders equity	$	108,000	$	153,000

Required:

A. Compute the gain or loss recognized by Rex,Felix, and DCC on a complete liquidation of the corporationassuming each shareholder receives a pro rata distribution of thecorporationâs assets and assumes a pro rata amount of theliabilities.

B. Compute the gain or loss recognized by Rex,Felix, and DCC on a complete liquidation of the corporationassuming Felix receives $35,000 in cash and Rex receives theremainder of the assets and assumes all of the liabilities.

For parts c and d: Assume Felix received the accounts receivableand equipment and assumed the accounts payable.

C. Will Felix recognize any income when hecollects the accounts receivable?

D. Will Felix be able to take a deduction whenhe pays the accounts payable?

For parts e and f: Assume Rex is a corporate shareholder ofDCC.

E. Compute the gain or loss recognized by Rex,Felix, and DCC on a complete liquidation of the corporationassuming each shareholder receives a pro rata distribution of thecorporationâs assets and assumes a pro rata amount of theliabilities.

F. Compute the gain or loss recognized by Rex,Felix, and DCC on a complete liquidation of the corporationassuming Felix receives $36,000 in cash and Rex receives theremainder of the assets and assumes all of the liabilities.

22) Boxer Corporation buysequipment in January of the current year with a 7-year class lifefor $15,000. The corporation expensed the $15,000 under Sec. 179.The deduction in the year of purchase for E&P purposes due tothe acquisition and expensing of the equipment is

	A. $14,000
	B. $15,000
	C. $1,500
	D. $3,000

23) Maxwell Corporation reportsthe following results:

Year	CurrentE&P	Distributions
2005	$6,000	$4,000
2006	5,000	1,000
2007	1,000	-0-

Maxwell's dividends-received deduction is

	A. $5,000
	B. $12,000
	C. $0
	D. $7,000

24) Identify which of thefollowing statements is false.

	A. At formation, acorporation's E&P depends on the amount of capital contributedby the shareholders.
	B. Adjustments totaxable income when computing E&P do not include tax exemptinterest.
	C. For E&Pdividend distribution purposes, property as defined in Sec. 317(a)includes money.
	D. The function ofE&P is to provide a measure of a corporation's economic abilityto pay dividends.

25) Exit Corporation hasaccumulated E&P of $24,000 at the beginning of the current taxyear. Current E&P is $20,000. During the year the corporationmakes the following distributions to its sole shareholder who has a$22,000 basis for her stock.

Date	AmountDistributed
April 1	$20,000
June 1	20,000
August 1	15,000
November 1	5,000

The treatment of the $15,000 August 1 distribution would be

	A. $4,000 is taxableas a dividend from accumulated E&P, and $11,000 is tax-free asa return of capital
	B. $5,000 is taxableas a dividend from current E&P and $10,000 is tax-free as areturn of capital
	C. $15,000 is taxableas a dividend; $5,000 from current E&P and the balance fromaccumulated E&P
	D. $15,000 is taxableas a dividend from accumulated E&P

26) Current E&P does notinclude

	A. tax-exemptinterest income
	B. life insuranceproceeds where the corporation is the beneficiary
	C. federal income taxrefunds from prior years
	D. All of the theseare included

27) Identify which of thefollowing statements is true.

	A. Section 179property must be expensed ratably over a 5-year period whencomputing E&P.
	B. Losses on propertysales to related parties are not deductible when computingE&P.
	C. Distributions madeout of accumulated E&P are allocated ratably between multipledistributions made during the tax year.
	D. All arefalse.

28) Crossroads Corporationdistributes $60,000 to its sole shareholder Harley. Crossroads hasearnings and profits of $55,000 and Harley's basis in her stock is$20,000. After the distribution, Harley's basis is

	A. $20,000
	B. $60,000
	C. $5,000
	D. $15,000

29) Hogg Corporation distributes$30,000 to its sole shareholder, Ima. At the time of thedistribution, Hoggs' E&P is $14,000 and Ima's basis in herstock is $10,000. Ima's gain from this transaction is

	A. $20,000 capitalgain
	B. $30,000 capitalgain
	C. $6,000 capitalgain
	D. $14,000 capitalgain

30) One consequence of aproperty distribution by a corporation to a shareholder is

	A. the amount of thedistribution is increased by any liability assumed by theshareholder
	B. any liabilitiesassumed by the shareholder do not reduce the shareholder'sbasis
	C. the shareholder'sbasis in the distributed property is the same as the distributingcorporation's basis
	D. the holding periodof the distributed property includes the holding period of thedistributing corporation

31) Identify which of thefollowing statements is true.

	A. The distributingcorporation's E&P must be reduced by the FMV of nontaxablestock rights distributed to shareholders.
	B. A stock redemptioncan be used to withdraw some assets from a corporation prior to asale of the business.
	C. A shareholder canredeem part of his stock and recognize a capital gain if thecorporation has only one shareholder.
	D. All arefalse.

32) Which of the following isnot a reason for a stock redemption?

	A. desire byremaining shareholders to retain control
	B. No outside marketexists for the stock.
	C. Redemption ofshares is a good corporate investment.
	D. desire byshareholders to reduce the corporate tax liability

33) Elijah owns 20% of ParkCorporation's single class of stock. Elijah's basis in the stock is$8,000. Park's E&P is $28,000. If Park redeems all of Elijah'sstock for $48,000, Elijah must report dividend income of

	A. $0
	B. $48,000
	C. $40,000
	D. $28,000

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TAX 9866 Lecture Notes - Lecture 5: Liquidating Distribution, Transfer Pricing, Profit Sharing

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