Questions and Comments, Popkin text pp. 74-75

1
ACCY 272 Session 10 Chapter 7 (A,B,C) COMPLETE
LIQUIDATIONS Text (Lind 6e), pp.
327-357 Problems, pp. 331-332, 344,
356-357 Cases, pp. 333-335Court Holding
Co., 335-337Cumberland Public Service
Co., 347-353Riggs, Inc. by Hugh Pforsich
1
1
2
Chapter 7 (A,B,C) 327-357 Table of Contents

• A. Introduction 327-328
• B. Complete Liquidations Under 331 328-345
• Consequences to the Shareholders 328-332
• Problems 331-332
• 2. Consequences to the Liquidating Corporation
  332-345
• a. Background 332-339
• Case Commissioner v. Court Holding Co. 333-335
• Case United States v. Cumberland Public Service
  Co. 335-337
• Note 337-339
• b. Liquidating Distributions and Sales 340
• c. Limitations on Recognition of Loss 340-345
• Problem 344
• C. Liquidation of a Subsidiary 345-357
• 1. Consequences to the Shareholders 345-347
• Case George L. Riggs, Inc. v. Commissioner
  347-353
• 2. Consequences to the Liquidating Subsidiary
  353-356
• Problems 356-357

2
2
3
A. Introduction 327-328
TOC
4
B. Complete Liquidations Under 331 328-345
TOC
5
B. Complete Liquidations Under 331 328-3451.
Consequences to the Shareholders 328-332
TOC
6
Complete Liquidations Under 331 328-3451.
Consequences to the Shareholders
328-332Problems 331-332

• A owns 100 shares of Humdrum Corporation which
  he purchased several years ago for 10,000.
  Humdrum has 12,000 of accumulated earnings and
  profits. What are the tax consequences to A on
  the liquidation of Humdrum Corporation in the
  following alternative situations
• (a) Humdrum distributes 20,000 to A in exchange
  for his stock?
• (b) What result in (a), above, if A receives
  10,000 in the current year (year one) and
  10,000 in year two? Would there be any problem
  if Humdrum does not adopt a formal plan of
  complete liquidation in year one?
• (c) Humdrum distributes 8,000 cash and an
  installment obligation with a face and fair
  market value of 12,000, payable 1,000 per year
  for 12 years with market rate interest. The
  installment obligation was received by Humdrum
  two months ago, after the adoption of the plan of
  liquidation, on the sale of a capital asset.
  Would the result be different if Humdrum's stock
  were publicly traded? See LR.C. 453(k).
• Same as (c), above, except the installment
  obligation was received two years ago and no
  payments have been made.
• What result in (a), above, if two years later, A
  is required to pay a 5,000 judgment against
  Humdrum in his capacity as transferee of the
  corporation? Compare this with the result if the
  judgment had been rendered and paid by the
  corporation prior to the liquidation. See
  Arrowsmith v. Commissioner, 344 U.S. 6, 73 S.Ct.
  71 (1952).

TOC
7
Complete Liquidations Under 331 328-3452.
Consequences to the Liquidating Corporation
332-345
TOC
8
Complete Liquidations Under 331 328-3452.
Consequences to the Liquidating Corporation
332-345a. Background 332-339
TOC
9
Complete Liquidations Under 331 328-3452.
Consequences to the Liquidating Corporation
332-345a. Background 332-339Case
Commissioner v. Court Holding Co. 333-335
TOC
10
Complete Liquidations Under 331 328-3452.
Consequences to the Liquidating Corporation
332-345a. Background 332-339Case United
States v. Cumberland Public Service Co. 335-337
TOC
11
Complete Liquidations Under 331 328-3452.
Consequences to the Liquidating Corporation
332-345a. Background 332-339Case United
States v. Cumberland Public Service Co.
335-337Note 337-339
TOC
12
Complete Liquidations Under 331 328-3452.
Consequences to the Liquidating Corporation
332-345 b. Liquidating Distributions and Sales
340
TOC
13
B. Complete Liquidations Under 331 328-3452.
Consequences to the Liquidating Corporation
332-345 c. Limitations on Recognition of Loss
340-345
TOC
14
Complete Liquidations Under 331 328-3452.
Consequences to the Liquidating Corporation
332-345 c. Limitations on Recognition of Loss
340-345Problem 344

• All the outstanding stock of X Corporation is
  owned by Ivan (60 shares) and Flo (40 shares),
  who are unrelated. X has no liabilities and the
  following assets
• Unless otherwise indicated, assume that Gainacre
  and Lossacre each asset have been held by X for
  more than five years.
• On January 1 of the current year, X adopted a
  plan of complete liquidation. What are the tax
  consequences to X on the distribution of its
  assets pursuant to the liquidation plan in each
  of the following alternatives?
• (a) X distributes each of its assets to Ivan and
  Flo as tenants-incommon in proportion to their
  stock interests (i.e., Ivan takes a 60 interest
  and Flo a 40 interest in each asset).
• (b) Same as (a), above, except X distributes
  Lossacre and the cash to Ivan and Gainacre to
  Flo.
• (c) Same as (b), above, except X distributes
  Gainacre and the cash to Ivan and Lossacre to
  Flo.
• (d) Same as (a), above, except X acquired
  Lossacre as a contribution to capital four years
  ago, and X was not required to reduce its basis
  under 362(e). Is the result different if
  Lossacre had a value of 1,000,000 and a basis of
  800,000 at the time it was contributed to the
  corporation?

TOC
15
Complete Liquidations Under 331 328-3452.
Consequences to the Liquidating Corporation
332-345 c. Limitations on Recognition of Loss
340-345Problem 344

• What result on the distributions in (c) above
  (i.e. Gainacre and cash to Ivan, Lossacre to Flo)
  if Lossacre, which had no relationship to X's
  business operations, was transferred to X by Ivan
  and Flo in a Section 351 transaction 18 months
  prior to the adoption of the liquidation plan,
  when Lossacre had a fair market value of 700,000
  and an adjusted basis of 800,000? Assume,
  alternatively, that Section 362(e)2) did and did
  not apply to the contribution of Lossacre to X.
• Now assume than Ivan and Flo own 80 and 20,
  respectively, of X, which was formed with Ivan
  contribution Gainacre and Lossacre (same adjusted
  basis and fair market value as in introductory
  facts above) and Flo contributing 200,000 cash.
  Assume further that Lossacre is Section 336(d)(1)
  "disqualified property," Section 362(e)(2)
  applied to Ivan's contributions to X but Section
  336(e)(2) does not apply to the liquidation
  distribution of Lossacre because there was no
  "plan" for X to recognize loss on that property.
  Pursuant to a liquidation plan, X distributes
  each of the assets to the two shareholders in
  proportion to their stock interests.
• (g) Same as (f), above, except assume that
  Section 362(e)(2) applied to Ivan's contribution
  to X and Section 336(d)(2) applies to Lossacre
  because there was a "plan" by X to recognize loss
  in that property.

TOC
16
C. Liquidation of a Subsidiary 345-357
TOC
17
C. Liquidation of a Subsidiary 345-3571.
Consequences to the Shareholders 345-347
TOC
18
C. Liquidation of a Subsidiary 345-3571.
Consequences to the Shareholders 345-347Case
George L. Riggs, Inc. v. Commissioner 347-353
TOC
19
C. Liquidation of a Subsidiary 345-3572.
Consequences to the Liquidating Subsidiary
353-356
TOC
20
C. Liquidation of a Subsidiary 345-3572.
Consequences to the Liquidating Subsidiary
353-356Problems 356-357

• 1. P, Inc. ("P") owns 90 percent of the
  outstanding stock of S, Inc. ("S"). Individual
  ("I") owns the remaining 10 percent of S. P's
  basis in its S stock is 3,000. Is basis in his
  S stock is 200. S has AEP of 2,000 and the
  following assets
• S wishes to liquidate and distribute all of its
  assets to its shareholders. What are the tax
  consequences to P, S and I in the following
  alternative situations?
• (a) S distributes the inventory to I and the
  other assets to P.
• (b) S distributes the equipment to I and the
  other assets to P. How might S improve this
  result?
• (c) What result in (b), above, if P's basis in
  its S stock were 30,000 and S had a 30,000
  basis in the land?
• (d) Is (c), above, a situation where P might
  wish to avoid the application of 332? Why? How
  might this be accomplished? Consider in this
  regard the 332 qualification requirements and
  how a parent might assure that they are not met.

TOC
21
C. Liquidation of a Subsidiary 345-3572.
Consequences to the Liquidating Subsidiary
353-356Problems 356-357

• 2. Child Corporation has 100 shares of common
  stock outstanding. Mother Corporation owns 75
  shares (basis-1,000) and Uncle, an individual
  who recently inherited his stock, owns 25 shares
  (basis-3,000). Child has no EP, a 10,000 NOL
  carryover and the following assets (all held
  long-term)
• What are the tax consequences in the following
  alternative situations, disregarding the impact
  of any tax paid by Child as a result of its
  liquidating distributions?
• (a) Child adopts a plan of complete liquidation
  and distributes 2,000 cash to Uncle and all its
  remaining assets to Mother.
• (b) Child distributes 2,000 cash to Uncle in
  redemption of his 25 shares. One week later, it
  adopts a plan of complete liquidation and
  distributes its remaining assets to Mother
  pursuant to the plan. What are Mother and Child
  trying to accomplish through this reunion?

TOC
22
C. Liquidation of a Subsidiary 345-3572.
Consequences to the Liquidating Subsidiary
353-356Problems 356-357

• Parent Corporation ("P") owns all the stock of
  Subsidiary Corporation ("S"). P has a 1,000
  basis in its 8 stock and also holds S bonds with
  a basis and face amount of 1,000. S has the
  following assets
• P intends to liquidate S, but before adopting a
  formal plan S distributes the inventory in
  satisfaction of its outstanding 1,000 debt to P.
  On the next day, S liquidates, distributing the
  land to P. Why did P and S structure the
  transactions in this manner? Will they achieve
  their tax objectives?

TOC