沉浸式翻译True / False |
1. Obtaining a favorable letter ruling from the IRS can ensure the desired tax treatment for parties contemplating a corporate reorganization.
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2. For corporate restructurings, meeting the § 368 reorganization “Type” requirements is all that needs to be considered when planning the structure of the transaction.
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3. For a corporate restructuring to qualify as a tax-free reorganization, the step transaction doctrine must apply.
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4. The tax treatment of reorganizations almost parallels the Federal income tax treatment for like-kind exchanges.
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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.
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6. The gain recognized by a shareholder in a corporate reorganization is based on the shareholder’s proportionate share of E & P.
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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.
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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.
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9. Since debt holders do not own stock, they do not fall under the corporate reorganization rules.
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10. The basis for the acquiring corporation in the target’s assets is increased by any gain recognized by the target.
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11. In a “Type A” merger or consolidation, the acquiring corporation may select which liabilities of the target it assumes.
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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.
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13. To qualify as a “Type A” reorganization, mergers must comply with the requirements of pertinent foreign, state, and Federal statutes.
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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.
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15. In a "Type B" reorganization the acquiring corporation must obtain at least 40% of the target corporation’s stock through the reorganization.
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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.
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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.
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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.
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19. For a capital restructuring to qualify as a “Type E,” there must be at least a 50% change in common stock ownership.
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20. An exchange of common stock for preferred stock or bonds for preferred stock can qualify as a “Type E” reorganization.
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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.
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22. A tax avoidance motive is an example of establishing a sound business purpose for a reorganization.
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23. The continuity of business enterprise doctrine requires that at least 40% of the target’s assets are acquired with stock.
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24. The continuity of interest doctrine requires that all target shareholders receive some acquiring stock.
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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.
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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.
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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.
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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.
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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.
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30. When applying the § 382 limitation to deductible losses, the § 382 limit first is applied to capital loss carryovers and then to NOLs.
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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.
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Multiple Choice |
32. Which of the following statements is true?
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33. All the following statements are true about corporate reorganization except:
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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?
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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?
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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?
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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?
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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?
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39. Which of the following conclusions regarding bonds in tax-favored corporate reorganizations is false?
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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?
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41. Which of the following statements is true regarding “Type A” reorganizations?
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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?
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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.
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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):
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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?
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46. Which of the following statements regarding “Type B” reorganizations is true?
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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?
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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:
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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?
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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?
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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?
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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?
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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?
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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?
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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.
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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?
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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?
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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?
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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.
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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?
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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?
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62. Which of the following statements is false?
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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?
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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?
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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?
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66. Which of the following statements is correct with regard to liabilities in corporate reorganizations?
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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?
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68. Heart Corporation holds net assets valued at $1 million and an NOL of $250,000. On December 31 of last year, Heart is acquired by Brain Corporation, a calendar year taxpayer, in a restructuring qualifying as a tax-free reorganization. Heart shareholders receive 45% of Brain’s shares in exchange for all of the Heart stock. Assuming that the Federal long-term tax-exempt rate is 3% and Brain’s discount factor is 7%, what is the maximum amount that Brain can use of Heart’s NOL this year?
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69. Monal Corporation merged with Bobwhite Corporation two years ago. At the time of the merger, Monal held an earnings and profits (E & P) deficit of $250,000, and Bobwhite held a positive E & P of $200,000. Last year’s current E & P was $ 100,000 for the successor company. Despite having only $10,000 E & P for the current year, Monal makes a distribution to its shareholders of $270,000. How much of the distribution is taxed to the shareholders?
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70. Flower Corporation has two divisions that it has operated for the last 10 years: Gerbera with a value of $806,000 (basis $400,000) and Daisy with a value of $744,000 (basis 800,000). While Gerbera is profitable, Daisy continues to incur losses and created a $350,000 NOL for Flower two years ago. Flower has decided it would like to become two corporations: Gerbera and Daisy. Which of the following is the best method for Flower to become two corporations?
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Completion |
71. The tax treatment of the parties involved in a tax-free reorganization almost exactly parallels the treatment under the like-kind exchange provisions. When ____________________ is received, gain may be ____________________, and losses are ____________________.
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72. ____________________ is other property received along with stock in a restructuring falling under § 368. If the shareholders receive the other property, it can be taxed as ____________________ and/or ____________________.
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73. In a ____________________ reorganization, each corporation must obtain the approval of the majority of its shareholders. The acquiring corporation must assume at least ____________________ percent of the target’s liabilities.
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74. Since the “Type B” reorganization precludes the use of ____________________, gain or loss is not recognized. In this type of reorganization, a ____________________ relationship between the acquiring and target corporations is created.
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75. For a “Type C” reorganization, "substantially all" of the assets means that at least ____________________ percent of the net asset value and ____________________ percent of the gross asset value.
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76. In a ____________________ reorganization, shareholders may exchange preferred stock for common or common for preferred stock.
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77. Changing from an S corporation to a C corporation is a Type ____________________ reorganization.
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78. Federal bankruptcy legislation created the Type ____________________ reorganization. To qualify for this type of reorganization, the corporation must be ____________________ before the reorganization.
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79. The acquiring corporation in a “Type G” reorganization must reduce the tax attributes carried over to it to the extent of the ____________________ relief.
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80. The ____________________ doctrine ensures that the acquiring corporation cannot immediately sell the target corporation's assets it receives in the reorganization. The ____________________ doctrine also prevents transactions that appear to be sales from qualifying as nontaxable reorganizations.
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81. In a ____________________ reorganization, the original corporation must receive at least 80% percent of new corporations’ stock. The assets transferred to the new corporations must have been owned and conducted as a trade or business for at least ____________________ years.
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82. The ____________________ doctrine treats several transactions as if they were one transaction when they are all integrated. The ____________________ doctrine ensures that the restructuring has a purpose beyond tax avoidance or evasion.
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83. Liabilities present income tax problems only in the ____________________ reorganization when the ____________________ corporation transfers other property (boot) as well as stock to the target.
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84. The ____________________ provides a restriction on the amount of tax attributes that can be carried over from the target to the acquiring corporation after an ownership change occurs.
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85. The yearly § 382 limitation is computed by multiplying the ____________________ of the loss corporation’s stock on the change date by the ____________________. For the ____________________, loss deductions are limited to the § 382 limitation times the number of days remaining in the year divided by the number of days in the year.
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86. Loss Corporation carries over an NOL, built-in ordinary losses, and capital losses. The § 382 limitation is applied to these carryover attributes in the following order: ____________________, ____________________, ____________________.
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Matching |
Match the following items with the statements that follow. Terms may be used more than once.
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87. Carries over to new corporations in a split-up reorganization.
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88. A 50 percentage-point change in ownership that occurs because of tax-free reorganization.
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89. Tax avoidance is not enough; transaction must have a corporate economic consequence.
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90. Requires the computation of a deduction equivalent when determining its limitation.
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91. Rate used to determine the § 382 limitation.
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92. When the transactions are so interdependent that the accomplishment of one would be fruitless without the completion of the series.
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93. Shareholders recognize gain to the extent the restructuring qualifies as a redemption.
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94. Any asset other than stock or securities received by the target shareholders.
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95. Requires at least a 40% carryover ownership by target shareholders.
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96. Can be treated as boot if cash as well as voting stock is the consideration used by the acquiring corporation in a “Type C” reorganization.
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What type of reorganization is effected in each of the following independent transactions?
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97. Flower Corporation is owned by Carry and Kim. All of Carry’s stock (value of $200,000) is exchanged for $200,000 in bonds. Kim exchanges no stock in the transaction.
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98. Green Corporation transfers 20% of its voting stock to Brown Corporation’s shareholders in exchange for 60% of Brown’s common stock and 90% of its preferred stock. Green acquired 30% of Brown’s common stock three years ago in a taxable transaction. Brown becomes a subsidiary of Green.
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99. Solar currently operates nine lines of business that have been in existence for 10 years. To protect its assets from possible lawsuits, Solar transfers each division to newly formed corporations in exchange for all of the stock of the new corporations. Solar distributes the stock in the nine new corporations to its shareholders in exchange for 45% of their stock in Solar.
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100. BarkCo and WoodCo contribute all of their assets to Tree Corporation in exchange for all of Tree’s stock. BarkCo and WoodCo distribute the Tree stock to their shareholders in exchange for their stock in BarkCo and WoodCo. The exchange completes the liquidation of BarkCo and WoodCo and each ceases to exist.
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101. Pear Corporation wishes to merge with Plum Corporation. Plum has better name recognition with consumers, so Pear would like Plum to be the surviving corporation. Pear transfers all of its assets and only liabilities associated with real estate to Plum for 45% of Plum’s shares. Pear distributes the Plum stock to its shareholders in exchange for their Pear stock. Pear then liquidates.
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102. Jones Corporation is insolvent and under state law protection from its creditors. Its assets are transferred to Smith Corporation in exchange for all of its stock. The stock is distributed to the creditors of Jones, and the shareholders receive only stock valued at 10% of their stock.
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103. Acquiring Corporation receives all the assets of Target Corporation in exchange for 1,000 preferred shares and 6,000 common shares of Acquiring, $25,000 cash, and assumption of all the liabilities of Target. After distributing the Acquiring stock and cash to its shareholders, Target liquidates.
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104. Snow Corporation, located in Washington state, establishes Rain Corporation, located in Arizona. Snow then transfers all of its assets to Rain in exchange for all of Snow’s stock. After distributing the Rain stock to its shareholders, Snow liquidates.
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105. Black Corporation has been engaged in manufacturing toys and investing in high technology corporate stock for eight years. Black creates Blue and White Corporations. It transfers the toy division to Blue and the investments to White in exchange for all of each corporation’s common voting stock. The stock of Blue and White is distributed to Black shareholders in return for all of their Black stock. Black then liquidates.
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106. Apple Corporation transfers voting stock to Orange Corporation in exchange for substantially all of its assets and its liabilities associated with the plant and equipment. Its general liabilities are not acquired by Apple. Orange distributes the Apple stock to its shareholders in exchange for their Orange stock. Orange then liquidates.
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Subjective Short Answer |
107. Cotinga Corporation is acquiring Petrel Corporation through a “Type C” reorganization by exchanging 20% of its voting stock and $50,000 for all of Petrel’s assets (value of $800,000 and basis of $600,000) and liabilities ($100,000). Jerrika owns 48% of Petrel (basis $270,000), and Allen owns the remaining 52% (basis $380,000). They exchange their stock in Petrel for their proportionate shares of the Cotinga stock and cash. What is the value of the Cotinga stock received by Jerrika and Allen? What are the amounts of gains/losses each recognizes due to the reorganization? What is Jerrika’s and Allen’s basis in the Cotinga stock?
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108. Acquiring Corporation transfers $500,000 stock and land with a value of $400,000 (basis of $250,000) to Target for most of its assets. The assets not acquired in the “Type A” reorganization are distributed to Target’s shareholder, Tia. They are valued at $100,000 (basis of $120,000). Acquiring stock and the land also are distributed to Tia in exchange for her stock in Target. Tia’s basis in her stock is $650,000. What is the gain or loss recognized by Acquiring, Target, and Tia on this restructuring? What is Tia’s basis in the Acquiring stock?
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109. Dipper Corporation is acquiring Bulbul Corporation by exchanging 220,000 shares of Dipper stock and $80,000 cash for all of Bulbul’s assets (valued at $500,000), liabilities ($200,000), and accumulated earnings and profits ($120,000). Betty purchased 40% of Bulbul five years ago for $60,000, and Keith purchased the remaining 60% for $90,000. What is the amount of the gain or loss (if any) that Betty and Keith recognize, assuming that the exchange qualifies as a § 368 reorganization? What is the basis in their new Dipper stock?
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110. Pipe Corporation is interested in acquiring all of Ore Corporation. It currently owns 30% of the outstanding Ore stock, which it purchased six years ago for $250,000. Pipe is a manufacturer of plumbing pipes with assets valued at $3 million and liabilities of $1 million. Ore supplies Pipe with copper from its mines that are valued at $4 million with $3 million in mortgages. Pipe negotiates the restructuring with Ore’s management. Pipe is concerned about potential environmental issues from the strip mining used by Ore and feels it needs liability protection.
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111. Present Value Tables needed for this question. Tony is the sole shareholder of Create Corporation. He is a chemical engineer and has been working hard to create a unique product but has been unsuccessful. Thus, Create has accumulated an NOL of $420,000. This year he finally finds the right combination for a new cleaning product. Predicting that Create will be very profitable next year, the corporation borrows $250,000 to pay Tony the salary he rightly deserves. Next year, Create does become profitable, earning $100,000 before application of carryovers. Mega Corporation, a huge ($50 million value, 25% combined state and Federal tax bracket) competitor, offers to purchase the patent from Create for $1,050,000. Knowing that Create’s NOL should be useful to Mega, Tony suggests a restructuring where he receives $800,000 in Mega stock, Mega assumes all of Create’s liabilities ($250,000) plus $75,000 cash for the NOL. Mega counter offers with cash for the NOL (to be determined), and $1,050,000 of stock, but it will not assume any liabilities. How much would be the maximum cash offered by Mega for the NOL, assuming that Mega uses a 12% discount factor and the Federal long-term tax-exempt rate is 4%? If Tony accepts Mega’s offer, what type of reorganization, if any, is this restructuring?
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112. Tin Corporation was created 10 years ago. It currently is valued at $1.5 million as follows: Tacks division ($420,000), Safety Pins division ($580,000), Paper Clips division ($450,000), and investment assets ($50,000). Tin currently has three shareholders: Antonio, who was the initial shareholder and now owns 40% of the stock (basis in stock $350,000), and Beth and Chang, each of whom purchased 30% of Tin two years ago for $435,000. Tin is having management problems: the shareholders cannot agree on the future of the company. They have determined that it would be best to divide up the company and go their separate ways. Each shareholder feels that the others do not deserve to continue using the Tin Corporation name.
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113. Gera owns 25,000 shares of Flow Corporation’s common stock, for which she paid $250,000. The other 5,000 shares belong to Gera’s brother, Earl, which he purchased for $50,000. Wanting to expand a few years ago, Flow sold $200,000 in bonds to Earl. The expansion has paid off, and Flow now can afford to redeem 50% of Earl’s bonds. Rather than have the bond redeemed, Earl would prefer to receive 100 shares of preferred stock for the $100,000 in bonds. At the same time, Gera would like to own preferred stock, so she turns in 5,000 shares of her common stock in exchange for 100 shares of preferred stock and 5,000 shares of her common for a $100,000 bond. Gera and Earl then each will hold 100 shares of preferred and $100,000 in bonds. Gera still owns 15,000 shares of common, and Earl owns 5,000 shares of common.
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114. Present Value Tables needed for this question. Sugar Corporation would like to acquire Salt Corporation on January 1 of the current year in a tax-free reorganization. Salt is particularly appealing to Sugar because Salt has a $350,000 capital loss that can carry over for five years. Sugar expects large capital gains for the next several years in addition to its expected $2.5 million net income. At the time of the restructuring, Salt has assets valued at $2 million (basis of $1.4 million). Sugar is proposing exchanging 45% of its stock for all of Salt’s assets. The Federal long-term tax-exempt rate is 2.5% and Sugar’s discount rate for investment decisions is currently 7%. What is the maximum present value of the capital loss to Sugar assuming it has a combined state and Federal tax rate of 25%?
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115. On March 1, Cream Corporation transfers all of its assets to Coffee Corporation in exchange for 10% of its common voting stock. At the time of the reorganization, Cream has assets valued at $4 million (basis of $3 million), and its earnings and profits account shows a deficit of $650,000. Coffee’s earnings and profits as of March 1 were $420,000. Due to the reorganization, Coffee incurs an NOL for the current year of $150,000. Coffee still declares its usual dividends of $100,000 paid on April 30, August 31, and December 31 ($300,000 of total dividends). How are the Coffee shareholders taxed on the distribution?
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116. Sauce Corporation is very interested in acquiring a controlling interest in Pear Corporation to obtain operating efficiencies. Sauce currently owns 30% of Pear, which it bought six years ago for $600,000. Sauce is a fruit processor with assets valued at $3 million and liabilities of $1 million. Pear supplies Sauce with fruit from its orchards that are valued at $4 million with $3 million in mortgages. Sauce has negotiated a restructuring with most of Pear’s shareholders. It will exchange one share of its stock for two shares of Pear. Pear’s founder, who own 10% of the outstanding common stock, is not willing to relinquish her stock; thus, Sauce cannot own 100% of Pear. What type of reorganization is being used here?
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Essay |
117. Explain whether shareholders are exempted from gain/loss recognition in nontaxable corporate reorganization or the gain/loss recognition is merely postponed. If it is postponed, how does the Federal income tax law ensure that the postponed gain/loss will be recognized in the future?
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118. What will cause the corporations involved in a § 368 reorganization to recognize gain or loss? What will cause shareholders of the companies involved in the corporate reorganization to recognize gain or loss? If gain is recognized by shareholders, how might it be taxed?
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119. In each of the following reorganizations, there is an exchange of stock for assets or stock for stock. Indicate for each reorganization the type of stock used for the exchanges, and the minimum percentage of stock that may be used for the restructurings to meet the § 368 requirements. Types: A; B; C; divisive D.
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120. Compare the consideration that can be used in “Type A,” “Type B,” and “Type C” reorganizations.
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121. Discuss the treatment of accumulated earnings and profits (E & P) in a corporate reorganization when both corporations have positive E & P. When the target corporation holds a negative E & P.
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122. Briefly describe three of the Federal judicial doctrines that may apply to tax-free corporate reorganizations.
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123. Provide the formula for the § 382 limitation and demonstrate how the formula is used in the year of the takeover. What is the purpose of the § 382 limitation?
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124. Both § 382 and “Type G” reorganizations allow beneficial tax attributes to carry over from the loss corporations to the successor. Compare the list of attributes are carried over for “Type G” reorganizations and for § 382, and the order of reduction/use of these attributes.
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