Exam 7: Corporate Acquisitions and Reorganizations

What are the advantages and disadvantages of a Type C reorganization?

Identify which of the following statements is true.

Paper Corporation adopts a plan of reorganization and exchanges 1,000 shares of its voting stock and $50,000 in cash for Chase Corporation's assets having a $200,000 adjusted basis and a $275,000 FMV. Chase Corporation is subsequently liquidated. What is Paper Corporation's basis in the assets acquired in the exchange?

Grand Corporation transfers 40% of its assets having an adjusted basis of $600,000 and an FMV of $800,000 to New Corporation in exchange for 75% of its single class of stock. Grand Corporation is owned equally by Annie and Betsy who are unrelated. Annie's basis for her Grand stock is $300,000 and Betsy's basis is $400,000. Annie exchanges all of her Grand stock for all of the New stock received in the exchange. Which of the following statements is correct concerning these transactions?

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?

In a triangular Type A merger, the acquiring subsidiary corporation must obtain substantially all of the target corporation's assets.

In a Sec. 338 election, the target corporation

Identify which of the following statements is true.

Identify which of the following statements is true.

In which of the following reorganizations does the distributing corporation transfer all of its assets to two controlled corporations before the distributing corporation dissolves?

Zebra Corporation transfers assets with a $120,000 basis and a $250,000 FMV to Hat Corporation for common stock worth $200,000 and cash of $50,000. The exchange qualifies as a tax- free reorganization. Zebra Corporation distributes the stock and cash to its shareholders pursuant to its liquidation. How much gain must Zebra Corporation recognize?

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?

In a Type B reorganization, the 1. stock of the target corporation is acquired solely for the voting stock of either the acquiring corporation or its parent. 2) acquiring corporation must have control of the target corporation immediately after the acquisit

Parent Corporation purchases all of Target Corporation's stock for $200,000 and makes a deemed liquidation election. Target Corporation has Class I assets with an adjusted basis of $55,000 and an FMV of $55,000; Class II assets with an adjusted basis of $40,000 and an FMV of $60,000; and Class V assets with an adjusted basis of $70,000 and an FMV of $100,000. The Class V assets are subject to a $20,000 liability. Assume a 34% corporate tax rate. What is the adjusted grossed- up basis of Target Corporation's stock?

American Corporation acquires the noncash assets of Utech Corporation in exchange for $700,000 of its voting stock plus $50,000 of cash. Utech Corporation assets are worth $750,000. Utech Corporation does not distribute the stock and cash but instead holds the stock as an investment. Utech will use the American cash along with the cash it retained to start a new business. The transaction can be classified as a

Buddy owns 100 of the outstanding shares of Binder Corporation stock. Buddy's basis in his Binder Corporation stock is $100,000. Binder Corporation is merged with Clipper Corporation in a tax- free reorganization. Buddy receives 50 shares of Clipper stock worth $150,000 and $150,000 cash. The remaining 100 shares of Binder stock were owned by Bruce who received the same consideration for his Binder stock. Binder and Clipper have E&P balances of $250,000 and $500,000, respectively. Buddy and Bruce each own 25% of Clipper Corporation's 200 shares of stock after the reorganization. Which of the following is correct?

Identify which of the following statements is true.

If the FMV of the stock received in a Type E reorganization does not equal the FMV of the stock surrendered, the difference may be

WorldCom is a telecommunications company that provides national and international service to local and long- distance customers. On September 14, 1998, WorldCom acquired MCI Communications Corporation (MCI) pursuant to a merger agreement. The acquisition can be divided into three stages: 1) WorldCom created an acquisitions subsidiary (TC Investments Corporation) by transferring WorldCom stoc cash to TC Investments Corporation in exchange for newly issued TC Investments Corporation stock. TC Investm Corporation then used the WorldCom stock and cash to acquire MCI as described in the next two steps. 2) TC Investments Corporation used cash to purchase all the outstanding MCI Class A common stock from Brit Telecommunications (BT) for $51 per share. BT had acquired the MCI Class A common stock two years earlier in merger attempt involving BT and MCI. In addition, TC Investments Corporation used WorldCom stock to acquir outstanding shares of regular MCI common stock from other MCI shareholders. In this exchange, MCI shareholders received 1.2439 shares of WorldCom stock for each share of regular MCI common stock surrendered. TC Investments Corporation paid cash in lieu of issuing fractional WorldCom shares to MCI shareholders who were entitled to such fractional shares. More than 50% of the consideration used to acquire MC was composed of WorldCom stock. 3) After the stock acquisition, MCI transferred its assets to TC Investments Corporation in a liquidation transac after which TC Investments Corporation held MCI assets instead of MCI stock. TC Investments Corporation then changed its name to MCI Communications Corporation, and WorldCom changed its name to MCI WorldCom. After these three steps, MCI Communications Corporation, which held the acquired MCI assets, ended up as a subsidiary of MCI WorldCom. Total assets of MCI WorldCom after the merger were $86 billion, including the st its subsidiary, MCI Communications Corporation. On December 31, 1997, prior to the acquisition, MCI had $576 million of U.S. NOL carryovers and $179 million o minimum tax credit carryovers. MCI WorldCom incurred expenses of $127 million in connection with the acquisition. MCI WorldCom recorded the transaction as a purchase for financial accounting purposes with the excess of cost over FMV being recorded as a combination of goodwill, in- process R&D costs, and other intangible assets. In addition, MCI WorldCom incurred $21 million in employee severance pay outlays. MCI stock options were converted into MCI WorldCom stock options. What type of reorganization did WorldCom and MCI engage in? What tax issues should the parties to the reorganization (MCI, BT, TC Investments Corporation, WorldCom, and the MCI and WorldCom shareholders) consider when evaluating the acquisition?

Define the seven classes of assets used in allocating basis when using the residual method.