Exam 7: Corporations: 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 if any) that Betty and Keith recognize, assuming that the exchange qualifies as a § 368 reorganization? What is the basis in their new Dipper stock?

Match the following items with the statements that follow. Terms may be used more than once. -Carries over to new corporations in a split-up reorganization.

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 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.

Match the following items with the statements that follow. Terms may be used more than once. -Can be treated as boot if cash as well as voting stock is the consideration used by the acquiring corporation in a "Type C" reorganization.

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.

Pallid Swift, Inc. is an S corporation located in Colorado. In the past year, PallidSwift has become profitable; but due to its rapid growth, it has no excess cash for distributions. Therefore, Pallid Swift decides that it should become a C corporation.

Xian Corporation and Win Corporation would like to combine into one entity. Win redeems 90% of its common stock and all of its nonvoting preferred stock in exchange for 40% of Xian's common and 20% of its nonvoting preferred stock. Win then distributes the Xian stock to its shareholders. Win then becomes a subsidiary of Xian.

Cuckoo Corporation has just lost a $500,000 product liability suit. Before the lawsuit, its assets were valued at $600,000 basis of $400,000), and it had general liabilities of $300,000 and $100,000 of bonds outstanding. It also has a $50,000 capital loss carryover, $10,000 general business credits, and $150,000 NOL. Cuckoo is solely owed by Emmy Lou. A state restructuring creates Turaco as the successor company to Cuckoo. Which of the following statements is false?

Winner Corporation, in the 25% combined state and Federal 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 $500,000. Loser holds business credits of $25,000, 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.

Which of the following statements regarding the applicability of the judicial doctrines to a "Type G" reorganization is correct?

Match the following items with the statements that follow. Terms may be used more than once. -Shareholders recognize gain to the extent the restructuring qualifies as a redemption.

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

Match the following items with the statements that follow. Terms may be used more than once. -Solar currently operates nine lines of business that have been in existence for 10 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.

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.

Present Value Tables needed for this question. Avocado Corporation wants to acquire Tomato Corporation because their businesses are complementary and Tomato has unused business credits of $60,000. Avocado is a manufacturer with a basis in its assets of $2.4 million value of $3.1 million) and liabilities of $600,000. It is in the 25% state and Federal combined tax bracket and uses a 10% discount factor when making investments. However, the Federal long-term tax-exempt rate is only 5%. Tomato is a distributor of a variety of products including those of Avocado's. Its basis in its assets is $2 million value of $1.5 million) and it has liabilities of $400,000. Avocado is willing to acquire only $1 million of Tomato's assets and all its liabilities for stock and $100,000 cash. Tomato will distribute its remaining assets, cash, and Avocado stock to its shareholders in exchange for their stock and then liquidate. a. Given these facts, what type of reorganization would you suggest for Avocado and Tomato? b. Diagram the reorganization transaction you suggested in part c. What is the maximum amount Avocado should be willing to pay for the business credits?

The amount of gain recognized by a shareholder in a corporate reorganization is based on the shareholder's proportionate share of E & P.

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

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

Explain whether shareholders are exempted from gain/loss recognition in nontaxable corporate reorganization or the gain/loss recognition is merely postponed. If postponed, what is the vehicle for ensuring the postponed gain/loss will be recognized in the future?

Which of the following conclusions regarding bonds in tax-favored corporate reorganizations is faulty?