Exam 7: Corporations: Reorganizations

Acquiring Corporation transfers $1 million of its voting common stock and $100,000 cash to Target Corporation in exchange for 90% of Target's assets. The assets retained by Target are used to settle its liabilities. Target then distributes the Acquiring stock and cash received to its shareholders in exchange for all their Target shares. Target then liquidates. This restructuring qualifies as a:

Against the will of Rally Corporation's management, Buoy Corporation offers Rally's shareholders 2 shares of Buoy common stock for each share of Rally common and 50 shares of Buoy common for each share of Rally preferred. The results of a hostile takeover yield Buoy 85% of Rally common stock and 100% of the preferred. The only stock it did not obtain was that owned by management. This transaction qualifies as an):

Present Value Tables needed for this question. Tony is the sole shareholder of Create Corporation. He is a chemical engineer and has been working hard to create a unique product but has been unsuccessful. Thus, Create has accumulated an NOL of $420,000. This year she finally finds the right combination for a new cleaning product. Predicting that Create will be very profitable next year, it borrows $250,000 to pay Tony the salary she rightly deserves. Next year, Create does become profitable, earning $100,000 before application of carryovers. Mega Corporation, a huge $50 million value, 25% combined state and Federal tax bracket) competitor, offers to purchase the patent from Tony for $1,050,000. Knowing that Create's NOL should be useful to Mega, Tony suggests a restructuring where she receives $800,000 in Mega stock, Mega assumes all of Create's liabilities $250,000) plus $75,000 cash for the NOL. Mega counter offers with cash for the NOL to be determined), and $1,050,000 of stock. It will not assume any liabilities. How much would be the maximum cash offered by Mega for the NOL, assuming that Mega uses a 12% discount factor and the Federal long-term tax-exempt rate is 4%? If Tony accepts Mega's offer, what type of reorganization, if any, is this restructuring?

Match the following items with the statements that follow. Terms may be used more than once. -Acquiring Corporation receives all the assets of Target Corporation in exchange for 1,000 preferred shares and 6,000 common shares of Acquiring, $25,000 cash, and assumption of all the liabilities of Target. After distributing the Acquiring stock and cash to its shareholders, Target liquidates.

What will cause the corporations involved in a § 368 reorganization to recognize gain or loss? What will cause shareholders of the companies involved in the corporate reorganization to recognize gain or loss? If gain is recognized by shareholders, what are the different tax character possibilities?

Individual shareholders would prefer to have a gain on a corporate reorganization treated as a capital gain rather than as a dividend, because they can reduce the amount taxable by their basis in the stock involved.

A shareholder bought 10,000 shares of Coral Corporation for $50,000 several years ago. When the stock is valued at $90,000, Coral redeems the shares in exchange for 5,000 shares of Blush Corporation stock and a $10,000 Blush bond. This transaction meets the requirements of § 368. Which of the following statements is false regarding this transaction?

Match the following items with the statements that follow. Terms may be used more than once. -BarkCo and WoodCo contribute all of their assets to Tree Corporation in exchange for all of Tree's stock. BarkCo and WoodCo distribute the Tree stock to their shareholders in exchange for their stock in BarkCo and WoodCo. The exchange completes the liquidation of BarkCo and WoodCo and each ceases to exist.

Provide the formula for the § 382 limitation and demonstrate how the formula is used in the year of the takeover. What is the purpose of the § 382 limitation?

Fuchsia Corporation would like to merge with Mauve Corporation. Which of the following will cause the transaction to be taxable?

Pipe Corporation is interested in acquiring all of Ore Corporation. It currently owns 30% of the outstanding Ore stock, which it purchased six years ago for $250,000. Pipe is a manufacturer of plumbing pipes with assets valued at $3 million and liabilities of $1 million. Ore supplies Pipe with copper from its mines that are valued at $4 million with $3 million in mortgages. Pipe negotiates the restructuring with Ore's management. Pipe is concerned about potential environmental issues from the strip mining used by Ore and feels it needs liability protection. a. Given these facts, what type of reorganization would you suggest for Pipe and Ore? b. Provide a diagram of the reorganization you suggest.

In which type of corporate reorganization do shareholders receive stock in at least two other corporations in exchange for all the stock in the original corporation?

The gains that shareholders recognize as a part of a corporate reorganization may be treated a dividend to the extent of the corporation's E & P.

Match the following items with the statements that follow. Terms may be used more than once. -Pear Corporation wishes to merge with Plum Corporation. Plum has more name recognition with consumers, so Pear would like Plum to be the surviving corporation. Pear transfers all of its assets and only liabilities associated with real estate to Plum for 45% of Plum's shares. Pear distributes the Plum stock to its shareholders in exchange for their Pear stock. Pear then liquidates.

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

Grebe Corporation is a car dealership that has been in existence for 10 years. It has also been in the car leasing business for 6 years. Both businesses produce substantial amounts of cash, and Grebe has been investing this cash in mutual funds for the past 10 years. Grebe is interested in separating its businesses. It will create a) new corporations) to receive assets in exchange for stock. Which of the following is correct regarding this transaction?

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, Asity is not interested in one operating division of Pitta. 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?

Cotinga Corporation is acquiring Petrel Corporation through a "Type C" reorganization by exchanging 20% of its voting stock and $50,000 for all of Petrel's assets value of $800,000 and basis of $600,000) and liabilities $100,000). Jerrika owns 48% of Petrel basis $270,000), and Allen owns the remaining 52% basis $380,000). They exchange their stock in Petrel for their proportionate shares of the Cotinga stock and cash. What is the value of the Cotinga stock received by Jerrika and Allen? What are the amounts of gains/losses each recognizes due to the reorganization? What is Jerrika's and Allen's basis in the Cotinga stock?

The doctrine treats several transactions as if they were one transaction when they are all integrated. The doctrine ensures that the restructuring has a purpose beyond tax avoidance or evasion.

The acquiring corporation in a "Type G" reorganization must reduce the tax attributes carried over to it to the extent of the relief.