Exam 7: Corporations: Reorganizations

In a reorganization, the original corporation must receive at least 80% percent of new corporations' stock. The assets transferred to the new corporations must have been owned and conducted as a trade or business for at least years.

Why is the shareholder's basis in the new stock received in a corporate reorganization the value of the stock received less the postponed gain?

One advantage of acquiring a corporation with losses is that after a tax-free reorganization, the remaining corporation may combine the negative earnings and profits E & P) of the target corporation with positive E & P of the acquiring corporation.

The tax treatment of reorganizations almost parallels the Federal income tax treatment for like-kind exchanges.

Burmese Corporation is interested in acquiring Javanese Corporation by transferring 30% of its stock for all of Javanese's assets valued at $500,000 basis of $150,000) and its $200,000 of liabilities. Javanese has created $50,000 in general business research credits that it cannot use. Javanese concentrates on pharmaceutical research whereas Burmese manufactures sun glasses. Burmese uses a discount factor of 8%, and the Federal applicable rate is 4%. Javanese will terminate after the restructuring. How will this transaction be treated for tax purposes?

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

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

Match the following items with the statements that follow. Terms may be used more than once. -Green Corporation transfers 20% of its voting stock to Brown Corporation's shareholders in exchange for 60% of Brown's common stock and 90% of its preferred stock. Green acquired 30% of Brown's common stock three years ago in a taxable transaction. Brown becomes a subsidiary of Green.

Dahlia owns $100,000 in Crimson Topaz preferred stock. The annual dividend rate on the preferred is 4%. She exchanges this preferred stock for $60,000 in Crimson Topaz bonds paying 4% annual interest and $40,000 in common stock. How is this transaction treated for tax purposes?

In a reorganization, shareholders may exchange preferred stock for common or common for preferred stock.

Match the following items with the statements that follow. Terms may be used more than once. -Jones Corporation is insolvent and under state law protection from its creditors. Its assets are transferred to Smith Corporation in exchange for all of its stock. The stock is distributed to the creditors of Jones, and the shareholders receive only stock valued at 10% of their stock.

Both § 382 and "Type G" reorganizations allow beneficial tax attributes to carry over from the loss corporations to the successor. Compare the list of attributes are carried over for "Type G" reorganizations and for § 382, and the order of reduction/use of these attributes.

Match the following items with the statements that follow. Terms may be used more than once. -Apple Corporation transfers voting stock to Orange Corporation in exchange for substantially all of its assets and its liabilities associated with the plant and equipment. Its general liabilities are not acquired by Apple. Orange distributes the Apple stock to its shareholders in exchange for their Orange stock. Orange then liquidates.

The application of the § 382 limitation to credits requires determining the income tax reduction benefit when applying the § 382 limitation to deductions.

All the following statements are true about corporate reorganization except:

When applying the § 382 limitation to deductible losses and credits, the § 382 limit first is applied to capital loss carryovers and then to NOLs.

A tax-free corporate reorganization can be utilized to:

The provides a restriction on the amount of tax attributes that can be carried over from the target to the acquiring corporation after an ownership change occurs.

Last year, Loss Corporation transferred all of its assets value of $8.2 million; basis of $2.7 million) and liabilities $3.7 million) to Gain Corporation in exchange for 40% of Gain's voting stock. Loss then liquidated. At the time of the reorganization, Loss had NOLs and excess credits that may be carried forward. For the current year, Gain has taxable income of $770,000 before considering the $150,000 NOL and $30,000 in excess credits carried to this year. If the Federal long-term tax-exempt rate was 4% at the time of the reorganization, what is the amount of NOL and credit carryovers Gain Corporation may utilize in the current year assuming a combined state and Federal tax rate of 25%? How much credit carries over to next year?