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Exam 7: Corporations: Reorganizations

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Question 41

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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?

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Corporations involved in § 368 reorganiz...

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Question 42

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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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B) False

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Question 43

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Present Value Tables needed for this question. Tony is the sole shareholder of Create Corporation. Tony 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 $240,000. This year she finally finds the right combination for a new cleaning product. Predicting that Create will be very profitable next year, Create borrows $250,000 to pay Tony the salary she rightly deserves. Next year, Create does become profitable, earning $100,000 before application of carryovers. Mega Corporation, a huge ($50 million value, 35% tax bracket) competitor, offers to purchase the patent from Tony for $750,000. Knowing that the Create's NOL should be useful to Mega, Tony suggests a restructuring where she receives $500,000 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 $750,000 of stock. It will not assume any liabilities. How much would be the maximum cash offered by Mega for the NOL, assuming that Mega uses an 11% discount factor and the Federal long­term tax­exempt rate is 4%? If Tony accepts Mega's offer, what type of reorganization, if any, is this restructuring?

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

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) :

Match the following items with the statements below. Terms may be used more than once. 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. Equity structure shift j. Federal long-term tax-exempt rate k. Liability assumption l. Ordinary gain m. Owner shift n. Ownership change o. Section 382 limitation p. Sound business purpose q. Step transaction -Shareholders recognize gain to the extent the restructuring qualifies as a redemption.

What type of reorganization is affected in each of the following independent transactions? a. "A" reorganization, merger b. "A" reorganization, consolidation c. "B" reorganization d. "C" reorganization e. Acquisitive "D" reorganization f. "D" reorganization, spin­off g. "D" reorganization, split­off h. "D" reorganization, split­up i. "E" reorganization j. "F" reorganization k. "G" reorganization l. Taxable transaction -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.

What type of reorganization is affected in each of the following independent transactions? a. "A" reorganization, merger b. "A" reorganization, consolidation c. "B" reorganization d. "C" reorganization e. Acquisitive "D" reorganization f. "D" reorganization, spin­off g. "D" reorganization, split­off h. "D" reorganization, split­up i. "E" reorganization j. "F" reorganization k. "G" reorganization l. Taxable transaction -Acquiring Corporation receives all of 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.

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 had 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 is the distribution taxed to the shareholders?

In an acquisitive "Type D" reorganization, substantially all of the target corporation's assets must be transferred to the acquiring corporation for stock amounting to at least 50% of the total acquiring stock.

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

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

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 with regard to this transaction?

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; acquisitive D, divisive D.

What type of reorganization is affected in each of the following independent transactions? a. "A" reorganization, merger b. "A" reorganization, consolidation c. "B" reorganization d. "C" reorganization e. Acquisitive "D" reorganization f. "D" reorganization, spin­off g. "D" reorganization, split­off h. "D" reorganization, split­up i. "E" reorganization j. "F" reorganization k. "G" reorganization l. Taxable transaction -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.

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

Present Value Tables needed for this question. Hair Corporation would like to acquire Scalp Corporation on August 31 because Scalp has an $8,000 capital loss carryover and $32,200 of general business credits that Hair could readily use. At this time, Scalp has assets valued at $1 million (basis of $1.1 million). While Hair is not interested in having Scalp's shareholders become its shareholders, it is interested in expanding into Scalp's business line. Hair thinks it could turn Scalp around with up­to­date equipment. Thus, Hair would like to sell Scalp's assets immediately, recognize the loss to offset its expected gains, and then use the proceeds to purchase new equipment. Hair is a very profitable corporation and is also expecting to have at least $50,000 of capital gains and $3 million in other income for the current year. Hair is proposing paying cash for all of Scalp's assets and liabilities. The Federal long­term tax­exempt rate is currently 3%, and Hair's discount factor for making investment decisions is 15%. a. Discuss the proposed restructuring and what steps should be taken to maximize Hair's and Scalp's benefits from the reorganization. b. What is the amount of Scalp's carryover loss that Hair may take in the current year assuming it meets all other tax law requirements? c. As of January 1 next year, what is the present value of carryovers remaining after the current year's utilization?

Which of the following statements is true concerning all types of tax-free corporate reorganizations?

What type of reorganization is affected in each of the following independent transactions? a. "A" reorganization, merger b. "A" reorganization, consolidation c. "B" reorganization d. "C" reorganization e. Acquisitive "D" reorganization f. "D" reorganization, spin­off g. "D" reorganization, split­off h. "D" reorganization, split­up i. "E" reorganization j. "F" reorganization k. "G" reorganization l. Taxable transaction -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.

What type of reorganization is affected in each of the following independent transactions? a. "A" reorganization, merger b. "A" reorganization, consolidation c. "B" reorganization d. "C" reorganization e. Acquisitive "D" reorganization f. "D" reorganization, spin­off g. "D" reorganization, split­off h. "D" reorganization, split­up i. "E" reorganization j. "F" reorganization k. "G" reorganization l. Taxable transaction -Solar currently operates nine lines of business that have been in existence for ten 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.