Share
Explore BrainMass

Consolidation, redemption, complete liquidation, capital loss

1. Condor Corporation pays $950,000 for 100% of the stock in Dove Corporation. Dove has a basis of $800,000 in its assets and E & P of $220,000. If Condor liquidates Dove and makes no special election, what are the tax consequences to Condor and to Dove?

2. The gross estate of Tanya, decedent, includes stock of Finch Corporation (E & P of $2 million) valued at $1.4 million. At the time of her death in 2011, Tanya owned 40% of the Finch stock outstanding, and she had a basis of $220,000 in the stock. The death taxes and funeral and administration expenses related to Tanya's estate amount to $1.4 million, and the adjusted gross estate is $7 million. The remainder of the Finch stock is owned by shareholders unrelated to Tanya (or her estate). Tanya named her son, Taylor, as the sole heir of her estate. In the current year, Finch Corporation distributes $1.4 million to the estate in redemption of all of its stock in the corporation. What are the tax consequences of the redemption to Tanya's estate and to Finch Corporation?

3. After a plan of complete liquidation has been adopted, Purple Corporation sells its only asset, land, to Rex (an unrelated party) for $800,000. Under the terms of the sale, Purple receives cash of $200,000 and Rex's note in the amount of $600,000. The note is payable over five years ($120,000 per year) and carries an appropriate rate of interest. Immediately after the sale, Purple distributes the cash and note to Helen, the sole shareholder of Purple Corporation. Helen has a basis of $80,000 in the Purple stock. What are the tax results to Helen if she wishes to defer as much gain as possible on the transaction? Assume the installment note possesses a value equal to its face amount.

4. Garden Corporation is considering acquiring Flower Corporation. Flower has a good product line and a fairly new production plant; however, it has made some unprofitable investments. Currently, Flower holds a five-year capital loss carry forward of $50,000. Garden holds its own $20,000 capital loss carryover that will expire in two years. In its acquisition of Flower, what should Garden consider when determining Flower's fair market value?

5. Lemon Corporation enters into a merger with Lime Corporation. Lemon has assets valued at $900,000 (basis of $980,000) and liabilities of $600,000. Lime transfers its stock for 90% of Lemon's assets and liabilities. Lemon distributes the Lime stock and its remaining asset (value of $90,000, adjusted basis of $80,000) subject to a liability ($60,000) to its shareholder, Lea, in exchange for her Lemon stock. Lea's basis in her Lemon stock is $350,000. Lemon liquidates after collecting all of its stock from Lea.
a. What is the value of stock transferred from Lime to Lemon?
b. What is the amount of gain (loss) realized and recognized by Lea from the merger? What is Lea's basis in her Lime stock?
c. What is the amount of gain (loss) realized and recognized by Lemon and Lime from the merger? What is Lime's basis in Lemon's assets?

Solution Preview

1. Condor Corporation pays $950,000 for 100% of the stock in Dove Corporation. Dove has a basis of $800,000 in its assets and E & P of $220,000. If Condor liquidates Dove and makes no special election, what are the tax consequences to Condor and to Dove?

Loss on distribution is disallowed since property is distributed to a related party. Since Condor is a parent corporation it will not recognize loss or gain on liquidation of subsidiary. The parent company will eventually recognize loss or gain on its distribution or sale of the assets since it acquires subsidiary basis (Block, 2004). And also the subsidiary does not recognize loss or gain on property distributed to the parent company. Property basis received by the parent corporation which is Condor has similar basis as subsidiary basis since there was no special election was made thus basis is worth $ 800,000. Condor will acquire tax attributes of Dove Corporation and this includes earnings and profits balance of $ 220,000. Condor will therefore pay taxes on the earnings and profit according to the stated corporate tax rates.

2. The gross estate of Tanya, decedent, includes stock of Finch Corporation (E & P of $2 million) valued at $1.4 million. At the time of her death in 2011, Tanya owned 40% of the Finch stock outstanding, and she had a basis of $220,000 in the stock. The death taxes and funeral and administration expenses related to Tanya's estate amount to $1.4 million, and the adjusted gross estate is $7 million. The remainder of the Finch stock is owned by shareholders unrelated to Tanya (or her estate). Tanya named her son, Taylor, as the sole heir of her estate. In the current year, Finch Corporation distributes $1.4 million to the estate in redemption of all of its stock in the corporation. What are the tax ...

Solution Summary

Consolidation, redemption, complete liquidation and capital loss is examined for taxation.

$2.19