Exam 7: Corporations: Reorganizations

Ula purchased stock in Purple, Inc., six years ago for $150,000. Purple has assets with a value of $225,000 $175,000 basis) and liabilities of $60,000. Purple transfers $200,000 of assets and all its liabilities to White Corporation in exchange for White common stock. Purple distributes the White stock and its $25,000 remaining asset cash) to Ula in exchange for all her Purple stock. Purple then liquidates. How is this transaction treated for tax purposes?

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.

In a "Type B" reorganization, the acquiring corporation obtains control by exchanging common and preferred stock in the same percentages as the target's outstanding common and preferred stock.

Sauce Corporation is very interested in acquiring a controlling interest in Pear Corporation to obtain operating efficiencies. Sauce currently owns 30% of Pear, which it bought six years ago for $600,000. Sauce is a fruit processor with assets valued at $3 million and liabilities of $1 million. Pear supplies Sauce with fruit from its orchards that are valued at $4 million with $3 million in mortgages. Pear also has $60,000 in unused general business credits. Sauce has negotiated a restructuring with most of Pear's shareholders. It will exchange one share of its stock for two shares of Pear. Pear's founder, who own 10% of the outstanding common stock, is not willing to relinquish her stock and thus, Sauce cannot own 100% of Pear. a. What type of reorganization is being used here? b. What is the value of $60,000 business credits to Sauce Corporation assuming that the Federal long-term tax-exempt rate is 3% and Sauce uses a discount rate of 10%?

Which of the following statements is true?

Match the following items with the statements that follow. 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 that follow. Terms may be used more than once. -Flower Corporation is owned by Carry and Kim. All of Carry's stock value of $200,000) is exchanged for $200,000 in bonds. Kim exchanges no stock in the transaction.

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

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 also would like to 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?

The doctrine ensures that the acquiring corporation cannot immediately sell the target corporation's assets it receives in the reorganization. The doctrine also prevents transactions that appear to be sales from qualifying as nontaxable reorganizations.

When a "Type F" reorganization includes a change from a taxable corporation to a flow-through entity, the original corporation stock loses its § 1244 status and earnings and profits do not carry over.

Ocelot Corporation is merging into Tiger Corporation under state law requirements. Ocelot transfers assets worth $300,000 to Tiger. Ocelot receives 30,000 shares of Tiger stock and $200,000 cash. Ocelot transfers the Tiger stock, $200,000 cash, and all of its liabilities $50,000) to its shareholder, Van, in exchange for all his Ocelot stock basis $100,000). Ocelot then liquidates. How is this transaction treated for tax purposes?

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

Mars Corporation merges into Jupiter Corporation by exchanging all of its assets for 300,000 shares of Jupiter stock valued at $2 per share and $100,000 cash. Wanda, the sole shareholder of Mars, surrenders her Mars stock basis $900,000) and receives all of the Jupiter stock transferred to Mars plus the $100,000. How does Wanda treat this transaction on her tax return?

Weaver Corporation has net assets valued at $800,000 and an NOL of $250,000. On September 30 of the current year, Weaver is acquired by Loom Corporation, a calendar year taxpayer, in a restructuring qualifying as a tax-free reorganization. Weaver shareholders receive 30% of Loom's shares in exchange for all of their Weaver stock. Assuming that the Federal long-term tax-exempt rate is 3%, what is the maximum amount of Weaver's NOL available to Loom in the current year?

Loss Corporation carries over an NOL, business credits, built-in ordinary losses, and capital losses. The § 382 limitation is applied to these carryover attributes in the following order: , ____________________, ____________________, ____________________.

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 $350,000 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 2.5% and Sugar's discount rate for investment decisions is currently 7%. What is the maximum present value of the capital loss to Sugar assuming it has a combined state and Federal tax rate of 25%?

If the acquiring corporation purchased 25% of target stock for cash 10 years ago, the acquiring corporation still can meet the "Type C" reorganization requirement that 80% of the target's assets be acquired with stock.

The yearly § 382 limitation is computed by multiplying the of the loss corporation's stock on the change date by the For the , the § 382 limitation is multiplied by the fraction equal to the number of days remaining in the year divided by the number of days in the year.

Match the following items with the statements that follow. Terms may be used more than once. -Black Corporation has been engaged in manufacturing toys and investing in high technology corporate stock for eight years. Black creates Blue and White Corporations. It transfers the toy division to Blue and the investments to White in exchange for all of each corporation's common voting stock. The stock of Blue and White is distributed to Black shareholders in return for all of their Black stock. Black then liquidates.