Exam 7: Corporations Reorganizations

Winner Corporation, in the 35% tax bracket, acquires the bankrupt Loser Corporation in a "Type G" reorganization. The assets of Loser are valued at $250,000 (basis of $300,000), and its liabilities are $400,000. Loser holds business credits of $35,000, capital losses of $75,000, and an NOL of $175,000 that will be carried over to Winner. Loser uses $100,000 of its liquid assets to pay off its general creditors. Assuming that no special elections are made, compute Winner's basis in Loser's assets and the amount of tax benefit carryovers available to Winner.

For corporate restructurings, meeting the § 368 reorganization "Type" requirements is all that needs to be considered when planning the structure of the transaction.

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.

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.

Match the following items with the statements below. Terms may be used more than once. -Requires at least a 40% carryover ownership by target shareholders.

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, there is one operating division of Pitta in which Asity is not interested. 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 with regard to the proposed restructuring?

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.

Which of the following statements is true regarding "Type A" reorganizations?

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 that Betty and Keith recognize (if any), assuming that the exchange qualifies as a § 368 reorganization? What is the basis in their new Dipper stock?

The Federal income tax treatment of a corporate restructuring is an extension of allowing entities to form without taxation.

Angus Corporation purchased 15% of Hereford Corporation 4 years ago for $150,000. Angus acquires 75% more of Herford's stock directly from the Hereford shareholders in an exchange for 25% of the Angus common stock currently outstanding. There is still 10% of the Hereford stock held by its original shareholders as they are not interested in being common shareholders of Angus. This transaction qualifies as what type of reorganization?

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.

Compare the consideration that can be used in "Type A," "Type B," and "Type C" reorganizations.

For a corporate restructuring to qualify as a tax-free reorganization, the step transaction doctrine must apply.

Match the following items with the statements below. Terms may be used more than once. -Rate used to determine the § 382 limitation.

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.

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 her its preferred stock . She also exchanges her bond for preferred. The nonvoting preferred shares owned by the nieces and nephew are exchanged for voting common stock. Which of the following statements is correct?

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 of 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.

Discuss the role of letter rulings in corporate reorganizations.

Gato Corporation exchanged 25% of its stock with Lobo for all of its assets. The Gato stock was distributed to the Lobo shareholders in exchange for all of their stock. Lobo then liquidated. At the time of the acquisition by Gato, the value of Lobo was $3 million, and the Federal long-term tax-exempt rate was 4%. In the current year, Gato has $500,000 of taxable income. Lobo has excess credits from prior years amounting to $150,000. What amount of Lobo's credits may Gato use in computing its Federal income tax for the year, if Gato is in the 34% tax bracket?