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Exam 7: Corporations Reorganizations

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Question 21

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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 8 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?

A) As a split-off "Type D" reorganization.
B) As a spin-off "Type D" reorganization.
C) As a spit-up "Type D" reorganization.
D) This transaction is treated as a stock dividend.
E) None of the above.

F) B) and E)
G) C) and D)

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Question 22

Multiple Choice

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Match the following items with the statements below. Terms may be used more than once. -Tax avoidance is not enough; transaction must have a corporate economic consequence.

A) Boot
B) Business credits
C) Capital gain
D) Continuity of business enterprise
E) Continuity of interest
F) Dividend
G) Discount rate
H) Earnings and profits
I) ​Federal long-term tax-exempt rate
J) Liability assumption
K) Ordinary gain
L) Ownership change
M) Section 382 limitation​
N) Sound business purpose
O) Step transaction

P) C) and F)
Q) F) and M)

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Question 23

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One advantage of acquiring a corporation with 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.

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 of her stock in Racket (basis $950,000) and then liquidates. Laocoon receives all of the 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 of his stock in Laocoon (basis $200,000) and then liquidates. How will this transaction be treated for tax purposes?

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

Match the following items with the statements below. Terms may be used more than once. -A 50 percentage-point change in ownership that occurs because of tax-free reorganization.

Match the following items with the statements below. Terms may be used more than once. -Shareholders recognize gain to the extent the restructuring qualifies as a redemption.

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 also 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. The common stock is valued at $20 per share the day before the preferred is issued. The preferred shares are valued at $1,000 each. State the type of reorganization, if any, for which these transactions qualify. What is the amount of gain or loss that Gera and Earl recognize on these transactions?

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

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, what are the different tax character possibilities?

Liabilities generally are not considered boot in corporate reorganizations except in a "Type C" when cash or other property is also used in the transaction.

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

Last year, Loss Corporation transferred all of its assets (value of $8.2 million; basis of $2.7 million) and liabilities ($3.7 million) to Gain Corporation in exchange for 40% of Gain's voting stock. Loss then liquidated. At the time of the reorganization, Loss had NOLs and excess credits that may be carried forward. For the current year, Gain has taxable income of $770,000 before considering the $150,000 NOL and $30,000 in excess credits carried to this year. If the Federal long-term tax-exempt rate was 4% at the time of the reorganization, what is the amount of NOL and credit carryovers Gain Corporation may utilize in the current year? How much credit carries over to next year?

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 ____________________.

____________________ 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 ____________________.

Individual shareholders would prefer to have a gain on a corporate reorganization treated as a capital gain rather than as a dividend, because they can reduce the amount taxable by their basis in the stock involved.

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

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 $250,000 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% and Sugar's discount rate for investment decisions both currently 7%. What is the maximum present value of the capital loss to Sugar?

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 created $50,000 in general business research credits which it cannot 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 tax purposes?

Briefly describe the Federal judicial doctrines that may apply to tax-free corporate reorganizations.