Exam 7: Corporate Acquisitions and Reorganizations

Identify which of the following statements is true.

In Fall 1999, Ford Motor Company's board of directors announced the $25.8 billion spin-off of its 80.7% interest in the Associated First Capital Corporation finance unit to the Ford shareholders. Ford said that it would distribute about $22.7 billion in Associates shares to its holders of Ford common and Class B stock, and $3.1 billion in cash to shareholders who hold Ford stock in U.S. employee savings accounts. According to market observers who track Ford operations, the spin-off is one of several moves Ford has taken to increase shareholder value by selling off nonautomotive assets, moves that included the initial public offering in April 1999 of Hertz Corporation. Ford said that it will take a one-time, noncash, nontaxable gain of about $16.5 billion in the first quarter as a result of the spin-off. What tax issues should the parties to the divisive transaction consider?

Grant Corporation transfers highly appreciated stock to Subsidiary Corporation in exchange for all of its stock. The Subsidiary Corporation stock is distributed to its sole shareholder, Peter. Three weeks after the distribution of the Subsidiary stock, Subsidiary Corporation liquidates. Peter then sells the appreciated stock that he received in the liquidation. This series of transactions

John Van Kirk owns all the stock of Monmouth Restaurant Corporation in Pittsburgh. John would like to sell his business and retire to sunny Florida now that he has turned 65. Pam, a long-time bartender at Monmouth Restaurant, offers to purchase all the business's noncash assets in exchange for a 25% down payment, with the remaining 75% being paid in five equal annual installments. Interest will be charged at a 10% rate on the unpaid installments. John plans to liquidate the corporation that has operated the restaurant and have Monmouth Restaurant distribute the installment notes and any remaining assets. What tax issues should Monmouth Restaurant, John, and Pam consider with respect to the purchase transaction?

Why would an acquiring corporation want an acquisition to be tax-free if it gets only a substituted basis rather than a step-up basis for the acquired assets?

Bob exchanges 4,000 shares of Beetle Corporation stock that he had purchased for $800,000 for 6,000 shares of Butterfly Corporation common stock with a fair market value of $1,000,000. What is Bob's recognized gain on the exchange and his basis in the Butterfly stock?

Shareholders in Boxer Corporation exchange all of their nonvoting Class B common stock for additional shares of Boxer's Class A common stock. Which of the following statements is correct?

Discuss the advantages and disadvantages of a tax-free reorganization as compared with a taxable transaction.

Paris Corporation has E&P of $200,000. Paris owns all of Slider Corporation's stock, which is worth $80,000. The stock has been held for five years. Paris distributes all of the Slider stock and $20,000 cash to a 50% shareholder in exchange for all of the shareholder's 100 shares of Paris stock. The exchange qualifies as a Sec. 355 split-off transaction. The 50% shareholder's basis in the Paris stock surrendered is $90,000. What is the amount of the gain that the 50% shareholder must recognize?

Pacific Corporation acquires 80% of the stock of Jackson Corporation for $3,000,000 in the current year. Jackson's assets have a basis of $2,000,000 and its liabilities are $800,000. The assets are worth $3,500,000. What gain is recognized by Jackson Corporation on the deemed sale of its assets if a Sec. 338 election is made?

Identify which of the following statements is false.

Martha owns Gator Corporation stock having an adjusted basis of $21,000. As part of a tax-free reorganization involving Gator and Baker Corporations, Martha exchanges her Gator stock for $18,000 of Baker stock and $6,000 (face amount and FMV) of Baker securities. What is Martha's basis in the Baker stock?

Dreyer Corporation purchased 5% of Willy Corporation's stock five years ago for $100,000. Dreyer then decides to purchase an additional 80% of the Willy stock for $1,000,000 on April 15 of the current year. On the acquisition date, Willy Corporation's liabilities are $150,000. A $300,000 tax liability is incurred by Willy on the Sec. 338 deemed sale. What is the total basis of Willy Corporation's assets for Sec. 338 basis allocation purposes?

Rocky is a party to a tax-free asset-for-stock reorganization. As part of the transaction, Rocky exchanges 100% of the Hope Corporation stock with a $40,000 basis and a $50,000 FMV for Moth Corporation stock worth $40,000 and $10,000 cash. Hope Corporation is subsequently liquidated as part of the reorganization, with Moth receiving the Hope assets and liabilities. Rocky is

Identify which of the following statements is true.

Identify which of the following statements is true.

Baxter Corporation transfers assets with an adjusted basis of $300,000 and an FMV of $500,000 to Duke Corporation for 90% of Duke's single class of stock worth $500,000. The Duke stock is then exchanged for Frank's 50% interest in Baxter Corporation. Frank's basis in the Baxter stock he surrenders is $120,000. What is Frank's basis in the Duke stock he receives?

Briefly describe A, B, C, D, and G reorganization types.

As part of a plan of corporate reorganization, Sally exchanged 1,000 shares of Tone Corporation common stock that she had purchased for $85,000, for 3,000 shares of Fade Corporation voting common stock having an $87,000 FMV. What is the amount and character of Sally's recognized gain and her basis in the Tone stock as a result of the exchange?

What are the advantages of a triangular merger?