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Chapter 07: Corporations Reorganizations

True / False
对/错

1. Obtaining a favorable letter ruling from the IRS can ensure the desired tax treatment for parties contemplating a corporate reorganization. 

2. For corporate restructurings, meeting the § 368 reorganization “Type” requirements is all that needs to be considered when planning the structure of the transaction. 

3. For a corporate restructuring to qualify as a tax-free reorganization, the step transaction doctrine must apply. 

4. The tax treatment of reorganizations almost parallels the Federal income tax treatment for like-kind exchanges. 

5. In corporate reorganizations, if an acquiring corporation is using property other than stock or debt as consideration, it may recognize gains but not losses on the transaction. 

6. The gain recognized by a shareholder in a corporate reorganization is based on the shareholder’s proportionate share of E & P. 

7. The gains that shareholders recognize as a part of a corporate reorganization may be treated a dividend to the extent of the corporation’s E & P. 

8. Target shareholders recognize gain or loss when they receive assets (boot) as well as stock in the acquiring corporation in a transaction meeting the § 368 requirements. 

9. Since debt holders do not own stock, they do not fall under the corporate reorganization rules. 

10. The basis for the acquiring corporation in the target’s assets is increased by any gain recognized by the target. 

11. In a “Type A” merger or consolidation, the acquiring corporation may select which liabilities of the target it assumes. 

12. While a “Type B” reorganization requires that voting stock be used by the acquiring corporation, in a “Type A,” the acquiring corporation can use common or preferred stock and still have the restructuring meet the qualifications of § 368. 

13. To qualify as a “Type A” reorganization, mergers must comply with the requirements of pertinent foreign, state, and Federal statutes. 

14. In a “Type B” reorganization, the acquiring corporation obtains control by exchanging common and preferred stock in the same percentages as the target’s outstanding common and preferred stock. 

15. In a "Type B" reorganization the acquiring corporation must obtain at least 40% of the target corporation’s stock through the reorganization. 

16. When substantially all the assets of the target corporation are received in exchange for voting stock and selected liabilities, the restructuring can qualify as a “Type C” reorganization. 

17. If the acquiring corporation purchased 25% of target stock for cash 10 years ago, the acquiring corporation still can meet the “Type C” reorganization requirement that 80% of the target’s assets be acquired with stock. 

18. In a divisive “Type D” reorganization, the distributing corporation obtains control of the new target by exchanging some of its assets for at least 80% of the new target’s outstanding stock. 

19. For a capital restructuring to qualify as a “Type E,” there must be at least a 50% change in common stock ownership. 

20. An exchange of common stock for preferred stock or bonds for preferred stock can qualify as a “Type E” reorganization. 

21. The acquiring corporation in a “Type G” reorganization reduces the tax attributes carried over from the bankrupt corporation by the percentage in change in ownership. 

22. A tax avoidance motive is an example of establishing a sound business purpose for a reorganization. 

23. The continuity of business enterprise doctrine requires that at least 40% of the target’s assets are acquired with stock. 

24. The continuity of interest doctrine requires that all target shareholders receive some acquiring stock. 

25. Without evidence to the contrary, the IRS views transactions occurring within one year of a reorganization as part of the restructuring, under the step transaction doctrine. 

26. Liabilities generally are not considered boot in corporate reorganizations except in a “Type C” when cash or other property is received by the target in the transaction. 

27. When the § 382 limitation is evoked, the acquiring corporation is limited in its use of the tax loss carryover of the loss corporation. The limitation is based on the net present value of the loss corporation using the Federal long-term discount rate. 

28. One advantage of acquiring a corporation with net operating losses is that after a tax-free reorganization, the remaining corporation may combine the negative earnings and profits (E & P) of the target corporation with positive E & P of the acquiring corporation. 

29. In a year in which an ownership change occurs for a corporation, the NOL carryforward is limited not only by the § 382 annual limitation but also by the percentage of the year remaining. 

30. When applying the § 382 limitation to deductible losses, the § 382 limit first is applied to capital loss carryovers and then to NOLs. 

31. Jambo Corporation transfers 20% of its voting stock, with a FMV of $20 million, to Diamond Corporation in exchange for all of Diamond’s assets. Both companies are publicly traded corporations. After the exchange, Diamond distributes the Jambo stock (its only remaining asset) to its shareholders and liquidates. If Jambo repurchased the shares used in the exchange, the excise tax on corporate stock buybacks will apply. 

Multiple Choice
多选题

32. Which of the following statements is true? 

33. All the following statements are true about corporate reorganization except: 

34. A shareholder bought 10,000 shares of Coral Corporation for $50,000 several years ago. When the stock is valued at $90,000, Coral redeems the shares in exchange for 5,000 shares of Blush Corporation stock and a $10,000 Blush bond. This transaction meets the requirements of § 368. Which of the following statements is false regarding this transaction? 

35. Bobcat Corporation redeems all of Zed’s 4,000 shares and distributes to him 2,000 shares of Van Corporation stock plus $50,000 cash. Zed’s basis in his 20% interest in Bobcat is $100,000 and the stock’s value is $250,000. At the time Bobcat is acquired by Van, the accumulated earnings and profits of Bobcat are $200,000 and of Van are $75,000. How does Zed treat this transaction for tax purposes? 

36. Mars Corporation merges into Jupiter Corporation by exchanging all of its assets for 300,000 shares of Jupiter stock valued at $2 per share and $100,000 cash. Wanda, the sole shareholder of Mars, surrenders her Mars stock (basis $900,000) and receives all of the Jupiter stock transferred to Mars plus the $100,000. How does Wanda treat this transaction on her Federal income tax return? 

37. Racket Corporation and Laocoon Corporation create Raccoon Corporation. Racket transfers $600,000 in assets for all of Raccoon’s common stock. Racket distributes its remaining assets ($300,000) and the Raccoon common stock to its shareholder, Mia, for all her stock in Racket (basis $950,000) and then liquidates. Laocoon receives all the Raccoon preferred stock for its $400,000 of assets. Laocoon distributes its remaining assets ($300,000) and the Raccoon preferred stock to its shareholder, Carlos, for all his stock in Laocoon (basis $200,000) and then liquidates. How will this transaction be treated for tax purposes? 

38. Why is the shareholder’s basis in the new stock received in a corporate reorganization equal to the value of the stock received less any postponed gain? 

39. Which of the following conclusions regarding bonds in tax-favored corporate reorganizations is false? 

40. Manx Corporation transfers 40% of its stock and $50,000 in cash to Somali Corporation for $500,000 of assets and all $200,000 of its liabilities. Somali exchanges the Manx stock, cash, and its remaining $100,000 of assets with its shareholders for all their Somali stock. After the exchange, Somali liquidates. The exchange qualifies as what type of transaction? 

41. Which of the following statements is true regarding “Type A” reorganizations? 

42. Ocelot Corporation is merging into Tiger Corporation, meeting all  state law requirements. Ocelot transfers assets worth $300,000 to Tiger. Ocelot receives 30,000 shares of Tiger stock and $200,000 cash. Ocelot transfers the Tiger stock, $200,000 cash, and all of its liabilities ($50,000) to its shareholder, Van, in exchange for all his Ocelot stock (basis $100,000). Ocelot then liquidates. How is this transaction treated for Federal income tax purposes? 

43. Xian Corporation and Win Corporation would like to combine into one entity. Win redeems 90% of its common stock and all of its nonvoting preferred stock in exchange for 40% of Xian’s common and 20% of its nonvoting preferred stock. Win then distributes the Xian stock to its shareholders. Win is now a subsidiary of Xian. 

44. Against the will of Rally Corporation’s management, Buoy Corporation offers Rally’s shareholders 2 shares of Buoy common stock for each share of Rally common and 50 shares of Buoy common for each share of Rally preferred. The results of a hostile takeover yield Buoy 85% of Rally common stock and 100% of the preferred. The only stock it did not obtain was that owned by management. This transaction qualifies as a(n): 

45. Humming Inc. is interested in acquiring BirdCo, a supplier of materials for Humming’s products, and feels that it could improve the management of BirdCo. Current management has been lax in monitoring product quality, which could lead to recalls or lawsuits. Management of BirdCo is not supportive of a merger because they could lose their positions, whereas most of the shareholders support the acquisition as a method of obtaining new management. There is a very small minority of shareholders who do not want to be shareholders of Humming. BirdCo holds assets of $5 million with a basis of $6 million. Its liabilities are $2 million. Which of the following would be the best solution for Humming in its acquisition of BirdCo? 

46. Which of the following statements regarding “Type B” reorganizations is true? 

47. Angus Corporation purchased 15% of Hereford Corporation four years ago for $150,000. Angus acquires 75% more of Hereford’s stock directly from Hereford shareholders in an exchange for 25% of Angus common stock currently outstanding. There is still 10% of the Hereford stock held by its original shareholders because they are not interested in being common shareholders of Angus. This transaction qualifies as what type of reorganization? 

48. Acquiring Corporation transfers $1 million of its voting common stock and $100,000 cash to Target Corporation in exchange for 90% of Target's assets. The assets retained by Target are used to settle its liabilities. Target then distributes the Acquiring stock and cash received to its shareholders in exchange for all their Target shares, after which it liquidates. This restructuring is a: 

49. Ula purchased stock in Purple, Inc., six years ago for $150,000. Purple has assets with a value of $225,000 ($175,000 basis) and liabilities of $60,000. Purple transfers $200,000 of assets and all its liabilities to White Corporation in exchange for White common stock. Purple distributes the White stock and its $25,000 remaining asset (cash) to Ula in exchange for all her Purple stock. Purple then liquidates. How is this transaction treated for Federal income tax purposes? 

50. Long Corporation has $500,000 of assets with a basis of $350,000 and liabilities of $125,000. ShortCo acquires Long’s assets and $100,000 of liabilities by exchanging $400,000 of its voting stock. Long distributes the ShortCo stock and remaining liabilities to its shareholder in exchange for the shareholder's Long stock with a basis of $275,000; then it liquidates. Which, if any, of the following statements is correct? 

51. Saucer Corporation has a value of $800,000, basis in its assets of $670,000, and liabilities of $200,000. Cup Corporation acquires 90% of Saucer’s assets by exchanging $550,000 of its voting stock, $20,000 cash, and assuming $150,000 of Saucer’s liabilities. The remaining 10% of Saucer’s assets not acquired is $80,000 cash. Saucer distributes the Cup stock, $100,000 in cash and associated $50,000 in liabilities to its shareholder, Sam, in exchange for his Saucer stock (basis $560,000). Saucer then liquidates. How will this transaction be treated for Federal income tax purposes? 

52. Grebe Corporation is a car dealership that has existed for 10 years. It also has been in the car leasing business for 6 years. Both businesses produce substantial amounts of cash, and Grebe has been investing this cash in mutual funds for the past 10 years. Grebe is interested in separating its businesses. It wants to create (a) new corporation(s) to receive assets in exchange for stock. Which of the following is correct regarding this transaction? 

53. Spoonbill Corporation has assets with a FMV of $800,000 and adjusted basis of $600,000. It has been manufacturing engineering equipment and laboratory tools for the last eight years. Spoonbill forms a new corporation, Roseate Corporation, by acquiring all of its stock in exchange for the laboratory tool division of Spoonbill. Each of the Spoonbill shareholders receives 1 share of Roseate stock for each 50 shares they own in Spoonbill. How will this transaction be treated for Federal income tax purposes? 

54. In which type of corporate reorganization do shareholders receive stock in at least two other corporations in exchange for all the stock in the original corporation? 

55. Crested Serpent Eagle (CSE) Corporation is owned by Lin Yuan and Yu Chi. It has been in the manufacturing and lumber businesses for 20 years. For liability protection, the manufacturing assets of CSE are transferred to Serpent Corporation for all its stock. This stock is distributed to Lin Yuan in exchange for her CSE stock. The lumber assets are transferred to Eagle Corporation for all of its stock. Yu Chi receives the Eagle stock in exchange for his CSE shares. CSE then terminates. 

56. WhydahCo is owned by Gilda and her four nieces and nephews. Gilda owns all the WhydahCo voting stock and its $50,000 bond. She wants to relinquish control of the entity; accordingly, WhydahCo redeems all of Gilda’s voting common stock and issues its preferred stock to her. She also exchanges her bond for preferred stock. The nonvoting preferred shares owned by the nieces and nephew are exchanged for voting common stock. Which of the following statements is correct? 

57. Peony owns all of the Garden Corporation common stock with a basis of $400,000 and a value of $900,000. Her grandchildren own nonvoting preferred stock with a basis and value of $540,000 that pays a 6% annual dividend.  Peony would like to transfer her ownership of Garden to her grandchildren but retain a guaranteed income from Garden. What would be the most income tax effective method of making this transfer? 

58. Dahlia owns $100,000 in Crimson Topaz preferred stock. The annual dividend rate on the preferred is 4%. She exchanges this preferred stock for $60,000 in Crimson Topaz bonds paying 4% annual interest and $40,000 in common stock. How is this transaction treated for income tax purposes? 

59. Pallid Swift, Inc. is an S corporation located in Colorado. In the past year, Pallid Swift has become profitable but, due to its rapid growth, it holds no excess cash for distributions. Therefore, Pallid Swift decides that it should become a C corporation. 

60. Cuckoo Corporation has just lost a $500,000 product liability suit. Before the lawsuit, its assets were valued at $600,000 (basis of $400,000), and it had general liabilities of $300,000 and $100,000 of bonds outstanding. It also has a $50,000 capital loss carryover, and a $150,000 NOL carryforward. Cuckoo is solely owed by Emmy Lou. A restructuring creates Turaco as the successor company to Cuckoo. Which of the following statements is false? 

61. Burmese Corporation is interested in acquiring Javanese Corporation by transferring 30% of its stock for all of Javanese’s assets valued at $500,000 (basis of $150,000) and its $200,000 of liabilities. Javanese has $50,000 of capital loss carryforwards that it has been unable to use. Javanese concentrates on pharmaceutical research whereas Burmese manufactures sun glasses. Burmese uses a discount factor of 8%, and the Federal applicable rate is 4%. Javanese will terminate after the restructuring. How will this transaction be treated for Federal income tax purposes? 

62. Which of the following statements is false? 

63. Target sells assets not desired by Acquirer before entering into a reorganization transaction with Acquirer. In which reorganization will the step transaction doctrine not apply to the sale by Target? 

64. Asity Corporation is interested in acquiring the majority of Pitta Corporation’s assets. Pitta’s assets are currently valued at $950,000, and its liabilities are $250,000. However, Asity is not interested in one operating division of Pitta. Since Pitta desires to be taken over by Asity, Pitta first sells the unwanted division for its net fair market value of $250,000 ($350,000 FMV assets – $100,000 liabilities). Pitta then transfers its remaining assets and liabilities to Asity for $450,000 in common voting stock. Which of the following statements is correct? 

65. Besides the statutory requirements for tax-free treatment for corporate reorganizations, there are several judicial requirements. Which of the following statements is not true? 

66. Which of the following statements is correct with regard to liabilities in corporate reorganizations? 

67. Weaver Corporation has net assets valued at $800,000 and an NOL of $250,000. On September 30 of the current year, Weaver is acquired by Loom Corporation, a calendar year taxpayer, in a restructuring qualifying as a tax-free reorganization. Weaver shareholders receive 30% of Loom’s shares in exchange for all of their Weaver stock. Assuming that the Federal long-term tax-exempt rate is 3%, what is the maximum amount of Weaver’s NOL available to Loom in a non-leap year?